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Table of Contents

As filed with the Securities and Exchange Commission on May 6, 2013

Registration No. 333-167193

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

PLY GEM HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   3089   20-0645710

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (IRS Employer Identification No.)

5020 Weston Parkway, Suite 400

Cary, North Carolina 27513

(919) 677-3900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Shawn K. Poe

Chief Financial Officer

Ply Gem Holdings, Inc.

5020 Weston Parkway, Suite 400

Cary, North Carolina 27513

(919) 677-3900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

John C. Kennedy, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 373-3000

 

Stephen L. Burns, Esq.

William J. Whelan III, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

Approximate date of commencement of proposed sale to public:  As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨                  Accelerated filer   ¨                   Non-accelerated filer   þ                   Smaller reporting company  ¨

                             (Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  

Proposed Maximum

Aggregate Offering

Price(1)(2)

  

Amount of

Registration Fee(3)

Common Stock, par value $0.01 per share    $345,000,000    $27,528

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933.
(2)   Includes additional shares of common stock that the underwriters have the right to purchase to cover over-allotments, if any.
(3) The Registrant previously paid $21,390 of this amount in connection with the initial filing of this Registration Statement on May 28, 2010.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated May 6, 2013

Prospectus

             shares

 

LOGO

Ply Gem Holdings, Inc.

Common stock

This is an initial public offering of Ply Gem Holdings, Inc. common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $        and $        per share. We intend to apply for listing of our common stock on the New York Stock Exchange under the symbol “PGEM.”

We are selling                 shares of common stock. We have also granted the underwriters an option to purchase a maximum of                  additional shares of common stock to cover over-allotments.

Investing in our common stock involves risks. See “Risk factors” on page 15.

 

     Price to Public  

Underwriting

Discounts and

Commissions

  

Proceeds to

Ply Gem Holdings, Inc.

Per Share

  $   $    $

Total

  $   $    $

Delivery of the shares of common stock will be made against payment in New York, New York on or about                 , 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

J.P. Morgan   Credit Suisse   Goldman, Sachs & Co.
UBS Investment Bank   Deutsche Bank Securities

Zelman Partners LLC

BB&T Capital Markets   Stephens Inc.

                , 2013.


Table of Contents

 

LOGO

LOGO


Table of Contents

You should rely only on the information contained in this prospectus and any free writing prospectus we provide to you. Neither we nor the underwriters have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or such other date stated in this prospectus.

Table of contents

 

Prospectus summary

     1   

Risk factors

     15   

Cautionary note regarding forward-looking statements

     30   

Use of proceeds

     32   

Dividend policy

     34   

Capitalization

     35   

Dilution

     36   

Unaudited pro forma consolidated financial information

     38   

Selected historical consolidated financial data

     47   

Management’s discussion and analysis of financial condition and results of operations

     51   

Business

     84   

Management

     103   

Executive compensation

     111   

Principal stockholders

     132   

Certain relationships and related party transactions

     135   

Description of capital stock

     146   

Shares available for future sale

     151   

Material U.S. federal income tax consequences for non-U.S. holders

     154   

Underwriting

     158   

Legal matters

     166   

Experts

     166   

Where you can find more information

     166   

Index to consolidated financial statements

     F-1   

 

 

Until                     , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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Market and industry data

Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources. Some data are also based on good faith estimates by our management, which are derived from their review of internal surveys, as well as the independent sources listed above. Gary E. Robinette, our President and Chief Executive Officer, is a member of the Policy Advisory Board of Harvard University’s Joint Center for Housing Studies, and we have relied, in part, on its study for the market and statistical information included in this prospectus.

 

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Prospectus summary

This summary highlights material information about us and this offering, but does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including the “Risk factors” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus before investing. This prospectus includes forward-looking statements that involve risks and uncertainties. See “Cautionary note regarding forward-looking statements.”

Unless otherwise specified or the context requires otherwise, (i) the term “Ply Gem Holdings” refers to Ply Gem Holdings, Inc.; (ii) the term “Ply Gem Industries” refers to Ply Gem Industries, Inc., the principal operating subsidiary of Ply Gem Holdings; (iii) the terms “we,” “us,” “our,” “Ply Gem” and the “Company” refer collectively to Ply Gem Holdings and its subsidiaries; and (iv) the term “Reorganization Transactions” refers to the transactions described in “Certain relationships and related party transactions—Reorganization transactions.” The use of these terms is not intended to imply that Ply Gem Holdings and Ply Gem Industries are not separate and distinct legal entities.

Except as the context otherwise requires, references to information being “pro forma” or “on a pro forma basis” means such information is presented after giving effect to the Reorganization Transactions, the entry into the tax receivable agreement described in “Certain relationships and related party transactions—Tax receivable agreement,” this offering and the estimated use of proceeds from this offering as described under “Use of proceeds.” See “Unaudited pro forma financial information.”

Our company

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012 and approximately 54% and 46% of our sales, respectively, for the three months ended March 30, 2013. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers. For the year ended December 31, 2012, we had net sales of $1,121.3 million, adjusted EBITDA of $127.3 million and a net loss of $39.1 million. For the three months ended March 30, 2013, we had net sales of $257.1 million, adjusted EBITDA of $12.1 million and a net loss of $28.1 million.

Our competitive strengths

We believe the following competitive strengths differentiate us from our competitors and are critical to our continued success:

 

 

Leading Manufacturer of Exterior Building Products.  Based on our internal estimates and industry experience, we believe we have established leading positions in many of our core

 

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product categories including: No. 1 in vinyl siding in the U.S.; No. 1 in aluminum accessories in the U.S.; No. 2 in vinyl and aluminum windows in the U.S.; No. 1 in windows and doors in Western Canada; and a leading position in vinyl siding and accessories in Canada. We achieved this success by developing a broad offering of high quality products and providing superior service to our customers. We are one of the few companies in our industry that operate a geographically diverse manufacturing platform capable of servicing our customers across the entire United States and Western Canada. The scale of our operations also positions us well as customers look to consolidate their supplier base. We believe our broad offering of leading products, geographically diverse manufacturing platform and long-term customer relationships make us the manufacturer of choice for our customers’ exterior building products needs.

 

 

Comprehensive Product Portfolio with Strong Brand Recognition.  We offer a comprehensive portfolio of over twenty exterior building product categories covering a full range of price points. Our broad product line gives us a competitive advantage over other exterior building product suppliers who provide a narrower range of products by enabling us to provide our customers with a differentiated value proposition to meet their own customers’ needs. Our leading brands, such as Ply Gem®, Mastic® Home Exteriors, Variform®, Napco®, Georgia-Pacific (which we license) and Great Lakes® Window, are well recognized in the industry. Many of our customers actively support our brands and typically become closely tied to our brands through joint marketing and training, fostering long-term relationships under the common goal of delivering a quality product.

We believe a distinguishing factor in our customers’ selection of Ply Gem as a supplier is our innovation and quality for which our brands are known. As a result, our customers’ positive experiences with one product or brand affords us the opportunity to cross-sell additional products and effectively introduce new products. Since 2007, we have successfully implemented a more unified brand strategy to expand our cross-selling opportunities between our siding and window product offerings. For instance, we consolidated certain window product offerings under the Ply Gem brand to offer a national window platform to our customers, which we believe represents a comprehensive line of new construction and home repair and remodeling windows. Our unified branding and cross-selling strategy has produced market share gains across all product categories since 2011 with a significant retail home center, a large building products distributor, a large national builder, and several regional home builders. With our extensive product line breadth, industry-leading brands and national platform, we believe we can provide our current and future customers with a more cost-effective, single source from which to purchase their exterior building products.

 

 

Multi-Channel Distribution Network Servicing a Broad Customer Base.  We have a multi-channel distribution network that serves both the new construction and home repair and remodeling end markets through our broad customer base of specialty and wholesale distributors, retail home centers, lumberyards, remodeling dealers and builders. Our multi-channel distribution strategy has increased our sales and penetration within these end markets, while limiting our exposure to any one customer or channel, such that our top ten customers only accounted for approximately 45.9% of our net sales in 2012. We believe our strategy enables us to minimize channel conflict, reduce our reliance on any one channel and reach the greatest number of end customers while providing us with the ability to increase our sales and to sustain our financial performance through economic fluctuations.

 

 

Balanced Exposure to New Construction and Home Repair and Remodeling.  Our products are used in new construction and home repair and remodeling, with our diversified product mix

 

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reducing our overall exposure to any single sector. We operate in two reportable segments: (i) Siding, Fencing and Stone, which has been weighted towards home repair and remodeling, and (ii) Windows and Doors, which has historically focused on new construction. We have begun to expand our presence in the home repair and remodel window sector through the launch of a new series of repair and remodel window products, focusing on the unique requirements of this sector while leveraging our existing customer relationships. This is one of several initiatives that have been well received by our customers and that complement our established product offerings by utilizing our national sales force to sell multiple products in our portfolio. For example, our Mastic Window product, which launched in 2011, has produced favorable results with rapid net sales growth in the repair and remodeling market by leveraging our existing relationships within this sector. We believe the diversity of our end markets and products provides us with a unique opportunity to capitalize on the overall housing market recovery.

 

 

Highly Efficient, Low Cost Operating Platform.  Since mid-2006, we have closed or consolidated eight plants, generating savings of over $30 million annually, and significantly reduced our workforce. Since 2006, we also invested approximately $98.3 million in capital expenditures, including new product introductions and upgrades to equipment, facilities and technology, to continue improving our vertically integrated manufacturing platform. For example, our multi-plant window manufacturing platform allows us to service our customers with minimal lead times across a broad geographic coverage area, providing us a competitive advantage with the ability to operate in just-in-time fashion. This capability provides a unique service proposition to our customers while allowing us to maintain minimal inventory levels in our window product offerings. In addition, as a result of our polyvinyl chloride (“PVC”) resin purchasing scale (we are one of the largest purchasers in North America based on industry estimates), we are able to secure favorable prices, terms and input availability through various cycles. Furthermore, since 2008, we have centralized numerous back office functions to our corporate office that previously resided in our business segments. This enabled us to maximize our efficiencies and minimize selling, general, and administrative expenses during the U.S. housing downturn.

Through our strong cost controls, vertically-integrated manufacturing platform, continued investment in technology, focus on safety and significant purchasing scale, we have improved efficiency in our manufacturing facilities while maintaining a low fixed cost structure of approximately 21% of our total cost structure, which provides significant operating leverage as the housing market recovers. Furthermore, our manufacturing facilities are among the safest in North America with four of them having received the highest federal, state and/or provincial safety award and rating. We believe that we have one of the most efficient and safest operating platforms in the exterior building products industry, helping to drive our profitability.

 

 

Proven Track Record of Acquisition Integration and Cost Savings Realization.  Our seven acquisitions since early 2004 have enhanced our geographic diversity, expanded our product offerings and enabled us to enter new product categories. Our acquisition of United Stone Veneer (now branded Ply Gem Stone) in 2008 enabled us to enter the stone veneer product category, which is one of the fastest growing categories of exterior cladding products. We have maintained a disciplined focus on integrating new businesses, rather than operating them separately, and have realized meaningful synergies as a result. Through facility and headcount rationalizations, strategic sourcing and other manufacturing improvements, we have permanently eliminated over $50 million in aggregate costs. We view our ability to identify,

 

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execute and integrate acquisitions as one of our core strengths and expect that this offering will significantly improve our financial position and flexibility, enabling us to lead the continued consolidation of the exterior building products industry.

 

 

Strong Management Team with Significant Ownership.  We are led by a committed senior management team that has an average of over 20 years of relevant industry experience. Our current senior management, with financial and advisory support from affiliates of CI Capital Partners LLC, has successfully transformed Ply Gem from operating as a holding company with a broad set of brand offerings to an integrated business model under the Ply Gem brand, positioning our Company to grow profitably and rapidly as the housing market recovers. As of May 5, 2013, after giving effect to the Reorganization Transactions (assuming a public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), members of our management team held common stock and stock awards representing approximately         % of the shares of our Company, which will decline to         % upon completion of this offering (or     % if the underwriters exercise their over-allotment option in full).

Our business strategy

We are pursuing the following business and growth strategies:

 

 

Capture Growth Related to Housing Market Recovery.  As a leading manufacturer of exterior building products, we intend to capitalize on the continued recovery in the new construction market and the anticipated recovery in the home repair and remodeling market. The National Association of Home Builders’ (“NAHB”) 2012 estimate of single family housing starts was 535,000, which was approximately 49% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels. Furthermore, we believe that the underinvestment in homes during the recent recession and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling.

We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings. Our broad product offering addresses expected demand growth from all of these key trends through our exposure to the new construction and the home repair and remodeling end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.

 

 

Continue to Increase Market Penetration.  We intend to increase the market penetration of our siding, fencing and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities. Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories. In 2012, we maintained our U.S. vinyl siding leading market position at approximately 36.0%. We increased our market position to 36.0% in 2011 from 32.3% in 2010 due in part to a significant customer win in the retail sales channel as well as with a top national builder. In 2012, we also continued to achieve strategic market share gains obtaining new regional window business with a large home center.

 

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The national builder win by our siding business in 2011 was an existing top ten customer in our window business. We believe that this demonstrates the substantial opportunity across our product categories to cross-sell and bundle products, thereby increasing revenues from our existing channel partners and industry relationships. Another example of this cross-selling opportunity is our 2010 introduction of a new vinyl windows line under our Ply Gem brand as well as under our Mastic Home Exteriors brand, historically associated with vinyl siding products. We expect to build upon our market positions as the housing market recovers from its current levels and to further enhance our leading positions.

 

 

Expand Brand Coverage and Product Innovation.  Ply Gem’s brand building efforts extend across multiple media, including national trade journals, website marketing, social media and national consumer magazines and broadcast outlets, both in the United States and Canada, resulting in over 10 million trade impressions and more than 200 million consumer impressions in 2012. Significant brand recognition in 2012 included Fox News “Fox and Friends” morning program, Better Homes and Gardens Magazine and The New York Times, each focusing on Ply Gem’s ability to deliver a complete exterior as a single manufacturer, something we call “The Designed Exterior by Ply Gem.” Our products also frequently receive industry recognition. For example, Consumer Reports placed The Designed Exterior at the top of their list for “Five Trends you can take home from the International Builders Show” in 2012.

We will continue to increase the value of the Ply Gem brands by introducing new product categories for our customers and by developing innovative new products within our existing product categories. For example, we have developed a complete series of window products under the Ply Gem brand to target the higher margin home repair and remodeling window end market. Furthermore, our 2008 addition of stone veneer to our product offering in the Siding, Fencing and Stone segment provides existing siding customers with access to the fastest growing category of exterior cladding products. In 2013, we announced that we will be manufacturing and selling cellular PVC trim and mouldings, a low-maintenance alternative to traditional wood trim designed to work well with siding, within the estimated $1.4 billion residential trim market.

During 2012, we continued our focus on innovation by establishing a new entity under Ply Gem Industries, Foundation Labs by Ply Gem, LLC (“Foundation Labs”), whose mission and purpose is to house product development from idea creation to product commercialization. By having dedicated resources committed to product development, we are investing in our future. The result of our commitment to product development and innovation has been demonstrated in the approximately $441.7 million of incremental annualized sales that we recognized for new products introduced from 2009 to 2012.

We also invest in our future and further brand development by pursuing certain strategic acquisitions if they fit our geographical footprint and strategic focus. For example, in April 2013 we acquired Gienow WinDoor Ltd. (“Gienow”), a manufacturer of windows and doors in Western Canada, and in May 2013 we entered into a share purchase agreement to acquire Mitten Inc. (“Mitten”), a leading manufacturer of vinyl siding and accessories in Canada. For additional information, see “—Recent developments.” These acquisitions will provide us with a significant presence in Canada and provide us with operating efficiencies to drive further market gains.

 

 

Drive Operational Leverage and Further Improvements.   While we reduced our production capacity during the past several years, we have retained the flexibility to bring back idled lines, facilities and production shifts in order to increase our production as market conditions improve. This incremental capacity can be selectively restarted, providing us with the ability to match increasing

 

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customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment. In our Windows and Doors segment, where we have historically focused on new construction, we believe that our new window products for home repair and remodeling will be able to drive increased volumes through these manufacturing facilities and enhance operating margins.

Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements. We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands. Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina, and believe that additional opportunities remain. We believe all of these factors should drive continued growth in profitability while improving our cash flow and capital efficiency.

Building products end markets

Demand for exterior building products, including siding, fencing, stone, windows and doors, is primarily driven by construction of new homes and repair and remodeling of existing homes, which are affected by changes in national and local economic and demographic conditions, employment levels, availability of financing, interest rates, consumer confidence and other economic factors.

New home construction

Management believes that a U.S. housing recovery is underway on a national basis, supported by favorable demographic trends, historically low interest rates and consumers who are increasingly optimistic about the U.S. housing market. New construction in the United States experienced strong growth from the early 1990s to 2006, with housing starts increasing at a compounded annual growth rate of 3.8%. However, from 2006 to 2012, single family housing starts are estimated to have declined 64% according to the NAHB. While the industry has experienced a period of severe correction, management believes that the long-term economic outlook for new construction in the United States is favorable and supported by an attractive interest rate environment, increasing consumer confidence, improving employment growth and strong demographics, as new household formations and increasing immigration drives demand for starter homes. According to the Joint Center for Housing Studies of Harvard University, net new household formations between 2010 and 2020 are expected to be approximately 11.8 million units.

Moreover, during 2012, single family housing starts are estimated to have increased 23.2% to 535,000 compared to 2011, having declined by 7.9% during the 2010 to 2011 period. Finally, the NAHB is currently forecasting single family housing starts to further increase in 2013 and 2014 by 24.2% and 28.9%, respectively.

Home repair and remodeling

Management believes that the U.S. home repair and remodeling products market is poised for a recovery. Since the early 1990s and through 2006, demand for home repair and remodeling products in the United States increased at a compounded annual growth rate of 4.3%, according

 

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to the U.S. Census Bureau, as a result of strong economic growth, low interest rates and favorable demographics. However, beginning in 2007 the ability for homeowners to finance repair and remodeling expenditures, such as replacement windows or vinyl siding, has been negatively impacted by a general tightening of lending requirements by financial institutions and the significant decrease in home values, which limited the amount of home equity against which homeowners could borrow. Management believes that expenditures for home repair and remodeling products are also affected by consumer confidence that continued to be depressed during 2012 due to general economic conditions, debt ceiling and national budget deliberations, and unemployment levels. Management believes the long-term economic outlook of the demand for home repair and remodeling products in the United States is favorable and supported by the move towards more energy-efficient products, recent underinvestment in home maintenance and repair, and an aging housing stock.

Recent developments

On April 9, 2013, we acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada, for consideration of approximately CAD $21.0 million, subject to certain purchase price adjustments. We used borrowings under the ABL Facility to pay the aggregate purchase price. For the year ended December 31, 2012, Gienow had total net sales of approximately CAD $102.1 million and a net loss of approximately CAD $2.5 million.

On May 6, 2013, we entered into a share purchase agreement to acquire all of the issued and outstanding capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada, for consideration of approximately CAD $82.0 million, subject to certain purchase price adjustments. We intend to use a portion of the net proceeds from this offering to pay the aggregate purchase price. For the year ended December 31, 2012, Mitten had net sales of approximately CAD $133.7 million and a net loss of approximately CAD $0.3 million. The acquisition is subject to a number of customary closing conditions, including the receipt of regulatory approvals, and there can be no assurance that the acquisition will be consummated.

The acquisitions of Gienow and Mitten will provide us with a significant presence in Canada and provide us with operating efficiencies to drive further market gains.

The financial information included in this prospectus for Gienow and Mitten has been prepared in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Canadian GAAS differs in some material respects from U.S. generally accepted accounting principles (“U.S. GAAP”), and so the financial information relating to Gienow and Mitten may not be comparable to the financial statements and financial information of U.S. companies, including the Company.

Risks associated with our business

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk factors.These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:

 

 

Downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit, could adversely impact our end users and lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.

 

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We face competition from other exterior building products manufacturers and alternative building materials. If we are unable to compete successfully, we could lose customers and our sales could decline.

 

 

Changes in the costs and availability of raw materials, especially PVC resin and aluminum, can decrease our profit margins by increasing our costs.

 

 

Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may decline if our key customers reduce the amount of products that they purchase from us.

 

 

Our business is seasonal and can be affected by inclement weather conditions that could affect the timing of the demand for our products and cause reduced profit margins when such conditions exist.

 

 

Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.

 

 

As of March 30, 2013, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $855.0 million of indebtedness outstanding. The significant amount of our indebtedness may limit the cash flow available to invest in the ongoing needs of our business.

 

 

We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. We may also be unable to generate sufficient cash to make required capital expenditures.

For a discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk factors.”

Our principal stockholders

After giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), affiliates of, and companies managed by, CI Capital Partners LLC (“CI Capital Partners”), including Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P. (collectively, the “CI Partnerships”), will beneficially own approximately         % of our common stock. Upon completion of this offering, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), the CI Partnerships are expected to beneficially own approximately         % of our outstanding common stock, or         % if the underwriters exercise their over-allotment option in full.

Upon the completion of this offering, we will be a “controlled company” within the meaning of the New York Stock Exchange’s corporate governance rules as a result of the ownership position and voting rights of the CI Partnerships. For a discussion of the applicable limitations and risks that may result from our status as a controlled company, see “Risk factors — Risks related to this offering and our common stock — As a “controlled company” within the meaning of the NYSE’s corporate governance rules, we will qualify for, and intend to rely on, exemptions from certain NYSE corporate governance requirements. As a result, our stockholders may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements” and “Management — Controlled company.”

 

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CI Capital Partners is a leading private equity investment firm specializing in leveraged buyouts of middle-market companies located primarily in North America. Since its inception, CI Capital Partners’ investment activities have been managed by Frederick Iseman and Steven Lefkowitz who have invested together for over 20 years. CI Capital Partners’ senior investment professionals have over 70 years of collective experience at CI Capital Partners.

Reorganization transactions

In connection with this offering, we will merge with our parent corporation and engage in a series of transactions that will convert the outstanding subordinated debt, common stock and preferred stock of our parent corporation into common equity and result in a single class of our common stock outstanding.

Currently, Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”) owns 100% of our capital stock. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the reorganization merger, we will issue a total of         shares of our common stock, representing         % of our outstanding common stock after giving effect to this offering (or     % if the underwriters exercise their over-allotment option in full). In the reorganization merger, all of the preferred stock of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that will have been converted into preferred stock as part of the Reorganization Transactions) will be converted into a number of shares of our common stock based on the initial public offering price of our common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock. The holders of common stock of Ply Gem Prime will receive an aggregate number of shares of our common stock equal to the difference between                  and the number of shares of our common stock issued to the holders of preferred stock of Ply Gem Prime. Based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), in the reorganization merger, holders of preferred stock of Ply Gem Prime will receive an aggregate of          shares of our common stock and holders of common stock of Ply Gem Prime will receive an aggregate of          shares of our common stock.

Finally, in connection with the reorganization merger, options to purchase shares of common stock of Ply Gem Prime will be converted into                  options to purchase shares of our common stock with adjustments to the per share exercise prices. See “Certain relationships and related party transactions — Reorganization transactions.

Corporate information

We were incorporated under the laws of the State of Delaware on January 23, 2004. Our principal executive offices are located at 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513. Our telephone number is (919) 677-3900. Our website is www.plygem.com. Information contained on our website does not constitute a part of this prospectus.

 

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The offering

 

Common stock outstanding before this offering

shares.

 

Common stock offered by us

shares.

 

Common stock to be outstanding immediately after this offering

shares (or         shares if the underwriters exercise their over-allotment option in full).

 

Over-allotment option

The underwriters have an option for a period of 30 days after the date of this prospectus to purchase up to                additional shares of our common stock from us to cover over-allotments.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $277.0 million (or $319.0 million if the underwriters exercise their over-allotment option in full), after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds to us (i) to redeem, repurchase or repay a portion of our outstanding indebtedness, (ii) to pay transaction fees and other expenses and (iii) for general corporate purposes, including to pay the aggregate purchase price for the acquisition of Mitten.

 

  See “Use of proceeds.”

 

Listing

We intend to apply to list our common stock on the New York Stock Exchange (“NYSE”) under the symbol “PGEM.”

 

Dividend policy

We do not intend to declare or pay any cash dividends on our common stock for the foreseeable future. See “Dividend policy.”

 

Risk factors

You should read the “Risk factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

The number of shares of our common stock outstanding after this offering excludes             shares that are subject to options granted pursuant to the Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan (the “2004 Option Plan”) as of March 30, 2013 at a weighted average exercise price of $        per share and             shares reserved for issuance under the Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (the “LTIP”, and together with the 2004 Option Plan, the “Equity Plans”). See “Executive compensation.”

Unless we indicate otherwise, all information in this prospectus:

 

 

assumes that the underwriters do not exercise their option to purchase from us up to             shares of our common stock to cover over-allotments;

 

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assumes a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus); and

 

 

gives effect to the Reorganization Transactions.

 

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Summary historical and pro forma consolidated financial

data of Ply Gem Holdings, Inc.

The summary historical consolidated financial data presented below for each of the years in the three year period ended December 31, 2012 have been derived from, and should be read together with, our audited consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The summary historical consolidated financial data presented below as of March 30, 2013 and for the three month periods ended March 30, 2013 and March 31, 2012 have been derived from, and should be read together with, our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, our unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial position and results of operations in these periods. The results of any interim period are not necessarily indicative of the results that can be expected for the full year or any future period. Except as otherwise noted below, the summary unaudited pro forma consolidated financial data presented below gives effect to the transactions described under “Unaudited pro forma financial information.

The information set forth below should be read in conjunction with “Capitalization,” “Unaudited pro forma financial information,” “Selected historical consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, amounts, percentages and figures shown as totals may not be the arithmetic aggregation of the individual amounts, percentages or figures that comprise or precede them.

 

     Three months ended     Year ended December 31,  
(amounts in thousands (except per share data))    
 
March 30,
2013
  
  
   
 
March 31,
2012
  
  
    2012        2011        2010   

Statement of operations data:(1)

         

Net sales

  $ 257,097      $ 239,176      $ 1,121,301      $ 1,034,857      $ 995,906   

Cost of products sold

    215,251        196,261        877,102        824,325        779,946   
 

 

 

 

Gross profit

    41,846        42,915        244,199        210,532        215,960   

Operating expenses:

         

Selling, general and administrative expenses

    38,216        34,993        147,242        138,912        130,460   

Amortization of intangible assets

    4,202        6,719        26,937        26,689        27,099   

Write-off of previously capitalized offering costs

                                1,571   
 

 

 

 

Total operating expenses

    42,418        41,712        174,179        165,601        159,130   
 

 

 

 

Operating earnings (loss)

    (572     1,203        70,020        44,931        56,830   

Foreign currency (loss) gain

    (33     68        409        492        510   

Interest expense

    (23,668     (25,056     (103,133     (101,488     (122,992

Interest income

    15        15        91        104        159   

Gain (loss) on modification or extinguishment of debt(2)

                  (3,607     (27,863     98,187   
 

 

 

 

Income (loss) before provision for income taxes

    (24,258     (23,770     (36,220     (83,824     32,694   

Provision for income taxes

    3,849        1,872        2,835        683        5,027   
 

 

 

 

Net income (loss)

  $ (28,107   $ (25,642   $ (39,055   $ (84,507   $ 27,667   
 

 

 

 

Basic and diluted earnings (loss) attributable to common stockholders per common share

  $ (281,070   $ (256,420   $ (390,550   $ (845,070   $ 276,670   

 

   

 

 

 

 

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(amounts in thousands (except per share data))    Three months ended     Year ended December 31,  
   March 30,
2013
    March 31,
2012
    2012     2011     2010  

Pro forma earnings per share:(3)(4)

                                        

Basic earnings per share

   $          $                    

Diluted earnings per share

          

Weighted average shares outstanding:

          

Basic weighted average shares outstanding

          

Diluted weighted average shares outstanding

          

Other data:

          

Adjusted EBITDA(5)

   $ 12,073      $ 15,267      $ 127,262      $ 114,501      $ 123,054   

Capital expenditures

     6,665        3,350        24,646        11,490        11,105   

Depreciation and amortization

     9,715        13,317        52,277        54,020        60,718   

Annual single family housing starts(6)

     N/A        N/A        535        434        471   

Selected statements of cash flows data:

          

Net cash provided by (used in):

          

Operating activities

     (59,414     (36,515   $ 48,704      $ (3,459   $ 6,748   

Investing activities

     (6,654     (3,229     (24,553     (11,388     (9,073

Financing activities

     49,938        48,134        (8,813     9,198        2,407   

 

 

 

Balance sheet data:    As of March 30, 2013  
   Actual     Pro forma(4)(7)  

Cash and cash equivalents

   $ 11,162      $ 93,162   

Total assets

     906,116     

Total long-term debt

     1,016,256        854,995   

Stockholder’s deficit

     (343,361        

 

(1)   In April 2012, we adopted the financial presentation provision of Accounting Standard Update 2011-05, Presentation of Comprehensive Income.

 

(2)   During the year ended December 31, 2012, we incurred a loss on modification or extinguishment of debt of approximately $3.6 million consisting of $1.5 million in call premiums, $0.4 million expense of unamortized debt issuance costs associated with the 13.125% Senior Subordinated Notes due 2014 (the “13.125% Senior Subordinated Notes”), $0.3 million expense of unamortized discount for the 13.125% Senior Subordinated Notes, and $1.4 million expense of third party fees for the 13.125% Senior Subordinated Notes. During the year ended December 31, 2011, we incurred a loss on modification or extinguishment of debt of approximately $27.9 million consisting of $10.9 million in tender premiums, $2.8 million expense of unamortized debt issuance costs associated with the 11.75% Senior Secured Notes due 2013 (the “11.75% Senior Secured Notes”), $0.8 million expense of unamortized discounts for the 11.75% Senior Secured Notes, $12.3 million expense of third party fees for the 8.25% Senior Secured Notes due 2018 (the “8.25% Senior Secured Notes”), and $1.2 million for the expense of unamortized debt issuance costs for the previous senior secured asset-based revolving credit facility. During the year ended December 31, 2010, we recorded a non-cash gain on extinguishment of debt of approximately $98.2 million in connection with the redemption of the 9% Senior Subordinated Notes due 2012 (the “9% Senior Subordinated Notes”) arising from a net reacquisition price of approximately $261.8 million versus the carrying value of the 9% Senior Subordinated Notes of $360.0 million. 

 

(3)   Reflects the Reorganization Transactions, this offering and the application of the net proceeds from this offering as described in “Use of proceeds.”

The following details the computation of the pro forma earnings per common share and is unaudited:

 

(amounts in thousands (except per share data))  

Three months ended

March 30, 2013

    Year ended
December 31, 2012
 

Net loss

  $ (28,107   $ (39,055

Unaudited pro forma weighted average common share calculation:

   

Conversion of Ply Gem Prime Holdings common stock

   

Conversion of Ply Gem Prime Holdings preferred stock

   

Unaudited basic pro forma weighted average shares outstanding

   

Treasury stock effect of outstanding stock options

   

Unaudited diluted pro forma weighted average shares outstanding

   

Pro forma earnings per common share:

   

Pro forma basic earnings per common share

   

Pro forma diluted earnings per common share

   

 

 

 

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(4)   The summary unaudited pro forma financial data are based upon available information and certain assumptions as discussed in the notes to the unaudited pro forma financial information presented under “Unaudited pro forma financial information.” The summary unaudited pro forma financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if each such transaction had occurred on the dates specified, nor does this data purport to represent the results of operations for any future period.

 

(5)   Adjusted EBITDA means net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash foreign currency transactions gain/(loss), non-cash loss (gain) on modification or extinguishment of debt, amortization of non-cash write-off of the portion of excess purchase price from acquisitions allocated to inventories, write-off of previously capitalized offering costs, environmental remediation, restructuring and integration expenses, acquisition costs, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships. Other companies may define adjusted EBITDA differently and, as a result, our measure of adjusted EBITDA may not be directly comparable to adjusted EBITDA of other companies. Management believes that the presentation of adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. We have included adjusted EBITDA because it is a key financial measure used by management to (i) internally measure our operating performance and (ii) determine our incentive compensation programs. In addition, our senior secured asset-based revolving credit facility (the “ABL Facility”) has certain covenants that apply ratios utilizing this measure of adjusted EBITDA.

Despite the importance of this measure in analyzing our business, measuring and determining incentive compensation and evaluating our operating performance, as well as the use of adjusted EBITDA measures by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP; nor is adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under the 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”), the 8.25% Senior Secured Notes, the 11.75% Senior Secured Notes, the 13.125% Senior Subordinated Notes or the ABL Facility;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements.

Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net earnings or operating earnings in accordance with U.S. GAAP as a measure of performance in accordance with U.S. GAAP. You are cautioned not to place undue reliance on adjusted EBITDA. The adjusted EBITDA amounts are unaudited.

The following table presents our calculation of adjusted EBITDA reconciled to net income (loss) and is unaudited:

 

      Three months ended     Year ended December 31,  
(amounts in thousands)    March 30,
2013
    March 31,
2012
    2012     2011     2010  

Net income (loss)

   $ (28,107   $ (25,642   $ (39,055   $ (84,507   $ 27,667   

Interest expense, net

     23,653        25,041        103,042        101,384        122,833   

Provision for income taxes

     3,849        1,872        2,835        683        5,027   

Depreciation and amortization

     9,715        13,317        52,277        54,020        60,718   

Non-cash loss (gain) on foreign currency transactions

     33        (68     (409     (492     (510

Non-cash (gain) loss on modification or extinguishment of debt(2)

                   3,607        27,863        (98,187

Write-off of previously capitalized offering costs

                                 1,571   

Restructuring and integration expenses

     2,380               1,677        1,616        910   

Acquisition costs

     315                               

Customer inventory buybacks

            445        768        10,087        574   

Environmental remediation

                          1,580          

Management fees(8)

     235        302        2,520        2,267        2,451   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 12,073      $ 15,267      $ 127,262      $ 114,501      $ 123,054   

 

(6)   Single family housing starts data furnished by NAHB forecast (as of April 13, 2013). These amounts are unaudited.

 

(7)  

Gives effect to the Reorganization Transactions, the creation of liabilities in connection with entering into the tax receivable agreement described in “Certain relationships and related party transactions—Tax receivable agreement,” this offering and the application of the net proceeds from this offering as described under “Use of proceeds” as if such transactions took place on March 30, 2013. These amounts are unaudited.

 

(8)   After the completion of this offering, the advisory agreement with an affiliate of the CI Partnerships will be terminated and management fees will no longer be paid.

 

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Risk factors

Investing in our common stock involves substantial risks. In addition to the other information in this prospectus, you should carefully read and consider the risk factors set forth below before deciding to invest in our common stock. Any of the following risks could adversely affect our business, results of operations, financial condition and liquidity. The market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events, causing you to lose all or part of your investment in our common stock. Certain statements in “Risk factors” are forward-looking statements. See “Cautionary note regarding forward-looking statements.”

Risks associated with our business

Downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit, could adversely impact our end users and lower the demand for, and pricing of, our products, which in turn could cause our net sales and net income to decrease.

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new construction spending, which declined significantly in the 2009 through 2011 period as compared to 2008 recovering slightly in 2012 compared to historical levels and are affected by such factors as interest rates, inflation, consumer confidence, unemployment and the availability of consumer credit.

Our performance is also dependent upon consumers having the ability to finance home repair and remodeling projects and/or the purchase of new homes. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures, which in turn could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. Trends such as declining home values, increased home foreclosures and tightening of credit standards by lending institutions, have negatively impacted the home repair and remodeling and the new construction sectors. If these credit market trends continue or worsen, our net sales and net income may be adversely affected.

We face competition from other exterior building products manufacturers and alternative building materials. If we are unable to compete successfully, we could lose customers and our sales could decline.

We compete with other national and regional manufacturers of exterior building products. Some of these companies are larger and have greater financial resources than we do. Accordingly, these competitors may be better equipped to withstand changes in conditions in the industries in which we operate and may have significantly greater operating and financial flexibility than we do. These competitors could take a greater share of sales and cause us to lose business from our customers. Additionally, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry in siding, and wood in windows. An increase in competition from other exterior building products manufacturers and alternative building materials could cause us to lose our customers and lead to decreases in net sales.

Changes in the costs and availability of raw materials, especially PVC resin and aluminum, can decrease our profit margins by increasing our costs.

Our principal raw materials, PVC resin and aluminum, have been subject to rapid price changes in the past. While we have historically been able to substantially pass on significant PVC resin and

 

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aluminum cost increases through price increases to our customers, our results of operations for individual quarters can be and have been hurt by a delay between the time of PVC resin and aluminum cost increases and price increases in our products. While we expect that any significant future PVC resin and aluminum cost increases will be offset in part or whole over time by price increases to our customers, we may not be able to pass on any future price increases.

Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, which may increase their buying power, which could materially and adversely affect our revenues, results of operations and financial position.

Certain of our important customers are large companies with significant buying power. In addition, potential further consolidation in the distribution channels could enhance the ability of certain of our customers to seek more favorable terms, including pricing, for the products that they purchase from us. Accordingly, our ability to maintain or raise prices in the future may be limited, including during periods of raw material and other cost increases. If we are forced to reduce prices or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other methods of competition, our revenues, operating results and financial position may be materially and adversely affected.

Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may decline if our key customers reduce the amount of products that they purchase from us.

Our top ten customers accounted for approximately 45.9% of our net sales in the year ended December 31, 2012. Our largest customer for the fiscal year ended December 31, 2012, ABC Supply Co., Inc., distributes our products within its building products distribution business, and accounted for approximately 10.5% of our consolidated 2012 net sales. We expect a small number of customers to continue to account for a substantial portion of our net sales for the foreseeable future.

The loss of, or a significant adverse change in our relationships with our largest customer or any other major customer could cause a material decrease in our net sales. The loss of, or a reduction in orders from, any significant customers, losses arising from customers’ disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major retail customer could cause a decrease in our net income and our cash flows. In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.

Our business is seasonal and can be affected by inclement weather conditions that could affect the timing of the demand for our products and cause reduced profit margins when such conditions exist.

Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because much of our overhead and operating expenses are spread ratably throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing reduced profit margins when such conditions exist.

 

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Increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers could delay or impede our production, reduce sales of our products and increase our costs.

Our financial performance is affected by the cost of labor. As of December 31,2012, approximately 14.5% of our employees were represented by labor unions. We are subject to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject of union organizing activity. Furthermore, some of our direct and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these suppliers could result in slowdowns or closures of facilities where components of our products are manufactured. Any interruption in the production or delivery of our products could reduce sales of our products and increase our costs.

Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train and retain qualified personnel at a competitive cost.

Many of the products that we manufacture and assemble require manual processes in plant environments. We believe that our success depends upon our ability to employ, train and retain qualified personnel with the ability to design, manufacture and assemble these products. In addition, our ability to expand our operations depends in part on our ability to increase our skilled labor force as the housing market recovers in the United States and Western Canada. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both. In addition, our ability to quickly and effectively train additional workforce to handle the increased volume and production while minimizing labor inefficiencies and maintaining product quality will be a strategic initiative in a housing market recovery. If either of these events were to occur, our cost structure could increase, our margins could decrease, and any growth potential could be impaired.

We may be subject to claims arising from the operations of our various businesses arising from periods prior to the dates we acquired them. Our ability to seek indemnification from the former owners of our subsidiaries may be limited, in which case, we would be liable for these claims.

We have acquired all of our subsidiaries, including Ply Gem Industries, MWM Holding, Inc. (“MWM Holding”), AWC Holding Company (“AWC,” and together with its subsidiaries, “Alenco”), Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”), Ply Gem Pacific Windows Corporation (“Pacific Windows”) and Gienow, and substantially all of the assets of Ply Gem Stone and Greendeck Products, LLC (“Greendeck”), in the last several years. In May 2013, we also entered into a share purchase agreement to acquire all of the capital stock of Mitten. We may be subject to claims or liabilities arising from the ownership or operation of our subsidiaries for the periods prior to our acquisition of them, including environmental liabilities. These claims or liabilities could be significant. Our ability to seek indemnification from the former owners of our subsidiaries for these claims or liabilities is limited by various factors, including the specific limitations contained in the respective acquisition agreement and the financial ability of the former owners to satisfy such claims or liabilities. If we are unable to enforce our indemnification rights against the former owners or if the former owners are unable to satisfy their obligations for any reason, including because of their current financial position, we could be held liable for the costs or obligations associated with such claims or liabilities, which could adversely affect our operating performance.

 

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We could face potential product liability claims, including class action claims, relating to products we manufacture.

We face an inherent business risk of exposure to product liability claims, including class action claims, in the event that the use of any of our products results in personal injury or property damage. In the event that any of our products proves to be defective, among other things, we may be responsible for damages related to any defective products and we may be required to recall or redesign such products. Because of the long useful life of our products, it is possible that latent defects might not appear for several years. Any insurance we maintain may not continue to be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Further, any claim or product recall could result in adverse publicity against us, which could cause our sales to decline, or increase our costs.

We are dependent on certain key personnel, the loss of whom could materially affect our financial performance and prospects.

Our continued success depends to a large extent upon the continued services of our senior management and certain key employees. To encourage the retention of certain key executives, we have entered into various equity-based compensation agreements with our senior executives, including Messrs. Robinette, Poe, Wayne, Buckley, and Morstad, designed to encourage their retention. Each member of our senior management team has substantial experience and expertise in our industry and has made significant contributions to our growth and success. We do face the risk, however, that members of our senior management may not continue in their current positions and the loss of their services could cause us to lose customers and reduce our net sales, lead to employee morale problems and/or the loss of key employees, or cause disruptions to our production. Also, we may be unable to find qualified individuals to replace any of the senior executive officers who leave our company.

Interruptions in deliveries of raw materials or finished goods could adversely affect our production and increase our costs, thereby decreasing our profitability.

Our dependency upon regular deliveries from suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. If any of our suppliers were unable to deliver materials to us for an extended period of time, as the result of financial difficulties, catastrophic events affecting their facilities or other factors beyond our control, or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer. We may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us. Even if acceptable alternatives were found, the process of locating and securing such alternatives might be disruptive to our business. Extended unavailability of a necessary raw material or finished goods could cause us to cease manufacturing one or more of our products for a period of time.

Environmental requirements may impose significant costs and liabilities on us.

Our facilities are subject to numerous United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. In addition, we have been identified as one of many

 

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potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal. We may be held liable, or incur fines or penalties in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of our properties from activities conducted by previous occupants, and the amount of any liability, fine or penalty may be material. For example, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. Certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

In addition, changes in environmental laws and regulations or in their enforcement, the discovery of previously unknown contamination or other liabilities relating to our properties and operations or the inability to enforce the indemnification obligations of the previous owners of our subsidiaries could result in significant environmental liabilities that could adversely impact our operating performance. In addition, we might incur significant capital and other costs to comply with increasingly stringent United States or Canadian environmental laws or enforcement policies that would decrease our cash flow.

Finally, while the stock purchase agreements governing certain of our acquisitions provide that the sellers will indemnify us, subject to certain limitations, for certain environmental liabilities, our ability to seek indemnification from the respective sellers is limited by various factors, including the financial condition of the indemnitor or responsible party as well as by limits to such indemnities or obligations. As a result, there can be no assurance that we could receive any indemnification from the sellers, and any related environmental liabilities, costs or penalties could have a material adverse effect on our financial condition and results of operations.

Manufacturing or assembly realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, due to the costs of implementation.

We continually review our manufacturing and assembly operations and sourcing capabilities. Effects of periodic manufacturing realignment, cost savings programs, and labor ramp-up costs could result in a decrease in our short-term earnings until the expected cost reductions are achieved and/or production volumes stabilize. Such programs may include the consolidation and integration of facilities, functions, systems and procedures. Such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.

We rely on a variety of intellectual property rights. Any threat to, or impairment of, these rights could cause us to incur costs to defend these rights.

As a company that manufactures and markets branded products, we rely heavily on trademark and service mark protection to protect our brands. We also have issued patents and rely on trade secret and copyright protection for certain of our technologies. These protections may not adequately safeguard our intellectual property and we may incur significant costs to defend our

 

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intellectual property rights, which may harm our operating results. There is a risk that third parties, including our current competitors, will infringe on our intellectual property rights, in which case we would have to defend these rights. There is also a risk that third parties, including our current competitors, will claim that our products infringe on their intellectual property rights. These third parties may bring infringement claims against us or our customers, which may harm our operating results.

Increases in fuel costs could cause our cost of products sold to increase and net income to decrease.

Increases in fuel costs can negatively impact our cost to deliver our products to our customers and thus increase our cost of products sold. The Company estimates that a 10% increase in fuel costs for the year ended December 31, 2012 would have increased cost of products sold by approximately $1.8 million. If we are unable to increase the selling price of our products to our customers to cover any increases in fuel costs, net income may be adversely affected.

Declines in our business conditions may result in an impairment of our tangible and intangible assets which could result in a material non-cash charge.

A negative long-term performance outlook could result in a decrease in net sales, which could result in a decrease in operating cash flows. These declines could result in an impairment of our tangible and intangible assets which results when the carrying value of the assets exceed their fair value.

The significant amount of our indebtedness may limit the cash flow available to invest in the ongoing needs of our business.

As of March 30, 2013, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $855.0 million of indebtedness outstanding, including $44.0 million of outstanding borrowings and $97.1 million of borrowing base availability under the ABL Facility.

Our indebtedness could have important consequences. For example, it could:

 

 

require us to dedicate a substantial portion of our cash flow from operations to interest and principal payments on our indebtedness, reducing the availability of our cash flow for other purposes, such as capital expenditures, acquisitions and working capital;

 

 

limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate and the general economy;

 

 

place us at a disadvantage compared to our competitors that have less debt;

 

 

expose us to fluctuations in the interest rate environment because the interest rates of our ABL Facility are at variable rates; and

 

 

limit our ability to borrow additional funds.

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our indebtedness.

 

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The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

The agreements that govern the terms of our debt, including the indentures that govern the 8.25% Senior Secured Notes due 2018 and the 9.375% Senior Notes and the credit agreement that governs the ABL Facility, contain covenants that restrict our ability and the ability of our subsidiaries to:

 

 

incur and guarantee indebtedness or issue equity interests of restricted subsidiaries;

 

 

repay subordinated indebtedness prior to its stated maturity;

 

 

pay dividends or make other distributions on or redeem or repurchase our stock;

 

 

issue capital stock;

 

 

make certain investments or acquisitions;

 

 

create liens;

 

 

sell certain assets or merge with or into other companies;

 

 

enter into certain transactions with stockholders and affiliates;

 

 

make capital expenditures; and

 

 

pay dividends, distributions or other payments from our subsidiaries.

These restrictions may affect our ability to grow our business and take advantage of market and business opportunities or to raise additional debt or equity capital.

In addition, under the ABL Facility, if our excess availability is less than the greater of (a) 12.5% of the lesser of the revolving credit commitments and the borrowing base and (b) $17.5 million, we will be required to comply with a minimum fixed charge coverage ratio test. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure that we will meet this ratio. A breach of any of these covenants under the ABL Facility or the indentures governing the 8.25% Senior Secured Notes or the 9.375% Senior Notes could result in an event of default under the ABL Facility or the indentures. An event of default under any of our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable and, in some cases, proceed against the collateral securing such indebtedness.

Moreover, the ABL Facility provides the lenders considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under the ABL Facility will not impose such actions during the term of the ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our liquidity.

We may be unable to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful. We may also be unable to generate sufficient cash to make required capital expenditures.

Our ability to make scheduled payments on or to refinance our debt obligations and to make capital expenditures depends on our financial condition and operating performance, which is

 

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subject to prevailing economic and competitive conditions and to financial, business and other factors. We will not be able to control many of these factors, such as economic conditions in the industry in which we operate and competitive pressures. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay or refinance our indebtedness, including the 8.25% Senior Secured Notes, the 9.375% Senior Notes or indebtedness under the ABL Facility, or make required capital expenditures. If our cash flows and capital resources are insufficient to fund our debt service obligations, we and our subsidiaries could face substantial liquidity problems and may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness.

In addition, if we do not have, or are unable to obtain, adequate funds to make all necessary capital expenditures when required, or if the amount of future capital expenditures are materially in excess of our anticipated or current expenditures, our product offerings may become dated, our productivity may decrease and the quality of our products may decline, which, in turn, could reduce our sales and profitability.

Our income tax net operating loss carryovers may be limited and our results of operations may be adversely impacted.

We have substantial deferred tax assets related to net operating loss carryforwards (“NOLs”) for United States federal and state income tax purposes, which are available to offset future taxable income. As a result, we project that the U.S. cash tax rate will be reduced from the federal statutory rate and state rate as a result of approximately $229.3 million of gross NOLs for federal purposes and $245.8 million of gross state NOLs. Our ability to utilize the NOLs may be limited as a result of certain events, such as insufficient future taxable income prior to expiration of the NOLs or annual limits imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), or by state law, as a result of a change in control. A change in control is generally defined as a cumulative change of more than 50 percentage points in the ownership positions of certain stockholders during a rolling three-year period. Changes in the ownership positions of certain stockholders could occur as the result of stock transactions by such stockholders and/or by the issuance of stock by us. Such limitations may cause us to pay income taxes earlier and in greater amounts than would be the case if the NOLs were not subject to such limitations. Should we determine that it is likely that our recorded NOL benefits are not realizable, we would be required to reduce the NOL tax benefits reflected on our consolidated financial statements to the net realizable amount by establishing a valuation reserve and recording a corresponding charge to earnings. Conversely, if we are required to reverse any portion of the accounting valuation allowance against our U.S. deferred tax assets related to our NOLs, such reversal could have a positive effect on our financial condition and results of operations in the period in which it is recorded.

We will be required to pay an affiliate of our current stockholders for certain tax benefits, including net operating loss carryovers, we may claim, and the amounts we may pay could be significant.

Upon the closing of this offering, we intend to enter into a tax receivable agreement with an entity controlled by our current stockholders (the “Tax Receivable Entity”). This tax receivable agreement will generally provide for the payment by us to the Tax Receivable Entity of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in periods after this offering as a result of (i) NOL carryovers from periods (or portions

 

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thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to this offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of this tax receivable agreement. See “Certain relationships and related party transactions—Tax receivable agreement.

The amount and timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future and the tax rate then applicable, our use of NOL carryovers and the portion of our payments under the tax receivable agreement constituting imputed interest.

The payments we will be required to make under the tax receivable agreement could be substantial. We expect that, as a result of the amount of the NOL carryovers from prior periods (or portions thereof) and the deductible expenses attributable to the transactions related to this offering, assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize in full the potential tax benefit described above, future payments under the tax receivable agreement, in respect of the federal and state NOL carryovers, will be approximately $86.8 million and will be paid within the next five years, assuming that utilization of such tax attributes is not subject to limitation under Section 382 of the Code as the result of an “ownership change” (within the meaning of Section 382 of the Code) of Ply Gem Holdings. These amounts reflect only the cash savings attributable to current tax attributes resulting from the NOL carryovers. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments from these tax attributes.

In addition, although we are not aware of any issue that would cause the U.S. Internal Revenue Service (“IRS”) to challenge the benefits arising under the tax receivable agreement, the Tax Receivable Entity will not reimburse us for any payments previously made if such benefits are subsequently disallowed, however, any excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in such circumstances, we could make payments under the tax receivable agreement that are greater than our actual cash tax savings and may not be able to recoup those payments, which could adversely affect our liquidity.

Finally, because we are a holding company with no operations of our own, our ability to make payments under the tax receivable agreement is dependent on the ability of our subsidiaries to make distributions to us. The ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the tax receivable agreement. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid, which could adversely affect our results of operations and could also affect our liquidity in periods in which such payments are made.

In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, or other forms of business combinations or certain other changes of control, our or our successor’s obligations with respect to tax benefits would be based on certain assumptions, including that we or our successor would have sufficient taxable income to fully utilize the NOL carryovers covered by the tax receivable agreement. As a result, upon a change of control, we may be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of our actual cash tax savings.

 

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Our ability to consummate and effectively integrate future acquisitions, if any, will be critical to maintaining and improving our operating performance.

We will continue to pursue strategic acquisitions into our business if they provide future financial and operational benefits. Successful completion of any strategic transaction depends on a number of factors that are not entirely within our control, including our ability to negotiate acceptable terms, conclude satisfactory agreements and obtain all necessary regulatory approvals. For example, the proposed acquisition of Mitten is subject to a number of customary closing conditions, including the receipt of regulatory approvals. There can be no assurance that we will consummate the Mitten acquisition or future acquisitions. In addition, our ability to effectively integrate these acquisitions into our existing business and culture may not be successful which could jeopardize future operational performance for the combined businesses.

Actual or perceived security vulnerabilities or cyberattacks on our networks could have a material adverse impact on our business and results of operations.

Purchase of our products may involve the transmission and/or storage of data, including in certain instances customers’ business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We devote significant resources to address security vulnerabilities through enhancing security and reliability features in our computer networks, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. Experienced hackers, cybercriminals and perpetrators of advanced persistent threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. However, because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until long after being launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could result in:

 

 

harm to our reputation or brand, which could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or use competing products;

 

 

state or federal enforcement action, which could result in fines, penalties and/or other liabilities and which may cause us to incur legal fees and costs; and/or

 

 

additional costs associated with responding to the cyberattack, such as the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities required by credit card associates, and costs incurred by credit card issuers associated with the compromise and additional monitoring of systems for further fraudulent activity.

Moreover, increased regulation regarding cybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cybersecurity audits.

Any of these actions could materially adversely impact our business and results of operations.

 

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Risks related to this offering and our common stock

We are controlled by the CI Partnerships whose interest in our business may be different than yours, and certain statutory provisions afforded to stockholders are not applicable to us.

After giving effect to the Reorganization Transactions and this offering, the CI Partnerships will own approximately         % of our outstanding common stock (or         % if the underwriters exercise their over-allotment in full) based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). Prior to the consummation of this offering, we will enter into an amended and restated stockholders agreement with the CI Partnerships and certain of our current and former members of management and their related parties. Under the stockholders agreement, the CI Partnerships will be initially entitled to nominate a majority of the members of our board of directors and all of the parties to the stockholders agreement have agreed to vote their shares of our common stock as directed by the CI Partnerships. See “Management—Board structure” and “Certain relationships and related party transactions—Stockholders agreement” for additional details on the composition of our board of directors and the rights of the CI Partnerships under the stockholders agreement.

Accordingly, the CI Partnerships will be able to exercise significant influence over our business policies and affairs. In addition, the CI Partnerships can control any action requiring the general approval of our stockholders, including the election of directors, the adoption of amendments to our certificate of incorporation and by-laws and the approval of mergers or sales of substantially all of our assets. The concentration of ownership and voting power of the CI Partnerships may also delay, defer or even prevent an acquisition by a third party or other change of control of our Company and may make some transactions more difficult or impossible without the support of the CI Partnerships, even if such events are in the best interests of minority stockholders. The concentration of voting power among the CI Partnerships may have an adverse effect on the price of our common stock.

In addition, we have opted out of section 203 of the General Corporation Law of the State of Delaware, which we refer to as the “Delaware General Corporation Law,” which, subject to certain exceptions, prohibits a publicly held Delaware corporation from engaging in a business combination transaction with an interested stockholder for a period of three years after the interested stockholder became such unless the transaction fits within an applicable exemption, such as board approval of the business combination or the transaction which resulted in such stockholder becoming an interested stockholder. However, our amended and restated certificate of incorporation will contain provisions that have the same effect as section 203 of the Delaware General Corporation Law, except that they will provide that the CI Partnerships and their respective affiliates and successors and certain of their transferees as a result of private sales will not be subject to such restrictions. Therefore, after the lock-up period expires, the CI Partnerships are able to transfer control of our Company to a third party by transferring their common stock, which would not require the approval of our board of directors or our other stockholders.

For additional information regarding the share ownership of, and our relationship with, the CI Partnerships, you should read the information under the headings “Principal stockholders” and “Certain relationships and related party transactions.”

 

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As a “controlled company” within the meaning of the NYSE’s corporate governance rules, we will qualify for, and intend to rely on, exemptions from certain NYSE corporate governance requirements. As a result, our stockholders may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the NYSE’s corporate governance requirements.

Following this offering, we will be a “controlled company” within the meaning of the NYSE’s corporate governance rules as a result of the ownership position and voting rights of the CI Partnerships upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. As a controlled company we may elect not to comply with certain NYSE corporate governance rules that would otherwise require our board of directors to have a majority of independent directors and our Compensation and Nominating and Governance Committees to be comprised entirely of independent directors. Accordingly, our stockholders will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. See “Management—Controlled company.”

Our directors who have relationships with the CI Partnerships may have conflicts of interest with respect to matters involving our Company.

Following this offering, three of our eight directors will be affiliated with the CI Partnerships. These persons will have fiduciary duties to both us and the CI Partnerships. As a result, they may have real or apparent conflicts of interest on matters affecting both us and the CI Partnerships, which in some circumstances may have interests adverse to ours. In addition, as a result of the CI Partnerships’ ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between us and the CI Partnerships including potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by us and other matters.

In addition, our amended and restated certificate of incorporation will provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of the CI Partnerships or certain related parties or any directors of the Company who are employees of the CI Partnerships or their affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our customers. To the extent they invest in such other businesses, the CI Partnerships may have differing interests than our other stockholders.

There has been no prior public market for our common stock and the trading price of our common stock may be adversely affected if an active trading market in our common stock does not develop. Our stock price may be volatile, and you may be unable to resell your shares at or above the offering price or at all.

Prior to this offering, there has been no public market for our common stock, and an active trading market may not develop or be sustained upon the completion of this offering. We cannot predict the extent to which investor interest will lead to the development of an active trading market in shares of our common stock or whether such a market will be sustained. The initial public offering price of the common stock offered in this prospectus was determined through our negotiations with the representatives of the underwriters specified under “Underwriting” (the “Representatives”) as further described under “Underwriting” and may not be indicative of the market price of the common stock after this offering. The market price of

 

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our common stock after this offering will be subject to significant fluctuations in response to, among other factors, variations in our operating results and market conditions specific to our industry.

Future sales of shares of our common stock in the public market could cause our stock price to fall significantly even if our business is profitable.

Upon the completion of this offering, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), we will have                 outstanding shares of common stock (or         shares if the underwriters exercise their over-allotment option in full). Of these shares, the shares of common stock offered in this prospectus will be freely tradable without restriction in the public market, unless purchased by our affiliates. We expect that the remaining         shares of common stock will become available for resale in the public market as shown in the chart below. Our officers, directors and the holders of substantially all of our outstanding shares of common stock have signed lock-up agreements pursuant to which they have agreed, subject to certain exceptions, not to sell, transfer or otherwise dispose of any of their shares for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. The underwriters may, in their sole discretion and without notice, release all or any portion of the common stock subject to lock-up agreements. The underwriters are entitled to waive the underwriter lock-up provisions at their discretion prior to the expiration dates of such lock-up agreements. For more information regarding the lock-up agreements, see “Underwriting.”

Immediately following the consummation of this offering, our shares of common stock will become available for resale in the public market as follows (assuming no exercise of the underwriters’ over-allotment option):

 

Number of shares    Percentage     Date of availability for resale into the public market
            Following the date of this prospectus
    
    

  180 days after the date of this prospectus, of which approximately                 are subject to holding period, volume and other restrictions under Rule 144

 

As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities. Following this offering, we intend to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), registering shares of our common stock reserved for issuance under our Equity Plans, and we will enter into a registration rights agreement under which we will grant demand and piggyback registration rights to the CI Partnerships and certain members of management, as further described under “Certain relationships and related party transactions—Registration rights agreement.”

See “Shares available for future sale” for a more detailed description of the shares that will be available for future sale upon completion of this offering.

 

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Because the initial public offering price per common share is substantially higher than our book value per common share, purchasers in this offering will immediately experience a substantial dilution in net tangible book value.

Purchasers of our common stock will experience immediate and substantial dilution in net tangible book value per share from the initial public offering price per share. After giving effect to the Reorganization Transactions, the sale of the             shares of common stock we have offered under this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom, our pro forma as adjusted net tangible book value as of March 30, 2013 would have been $        million, or $        per share of common stock. This represents an immediate dilution in pro forma as adjusted net tangible book value of $        per share to new investors purchasing shares of our common stock in this offering. See “Dilution” for a calculation of the dilution that purchasers will incur.

We do not intend to pay dividends in the foreseeable future, and, because we are a holding company, we may be unable to pay dividends.

For the foreseeable future, we intend to retain any earnings to finance our business, and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that our board of directors considers relevant. Furthermore, because we are a holding company with no operations of our own, any dividend payments would depend on the cash flow of our subsidiaries. The ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes limit the amount of distributions our subsidiaries can make to us and the purposes for which distributions can be made. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. Accordingly, we may not be able to pay dividends even if our board of directors would otherwise deem it appropriate. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources” and “Description of capital stock—Capital stock—Common stock.” For the foregoing reasons, you will not be able to rely on dividends to receive a return on your investment.

Provisions in our charter and by-laws may delay or prevent our acquisition by a third party.

Our amended and restated certificate of incorporation and by-laws, which we intend to adopt prior to the completion of this offering, will contain several provisions that may make it more difficult or expensive for a third party to acquire control of us without the approval of our board of directors. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. The provisions, some of which may only become effective when the CI Partnerships and their affiliates no longer beneficially own shares representing more than 50% of our outstanding shares of common stock (the “Triggering Event”), include, among others:

 

 

provisions relating to creating a board of directors that is divided into three classes with staggered terms;

 

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provisions relating to the number and election of directors, the appointment of directors upon an increase in the number of directors or vacancy and the removal of directors;

 

 

provisions requiring a 75% stockholder vote for the amendment of certain provisions of our certificate of incorporation and for the adoption, amendment or repeal of our by-laws following the Triggering Event;

 

 

provisions barring stockholders from calling a special meeting of stockholders or requiring one to be called following the Triggering Event;

 

 

elimination of the right of our stockholders to act by written consent following the Triggering Event;

 

 

provisions restricting business combinations with interested stockholders; and

 

 

provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals for consideration at meetings of stockholders.

For more information, see “Description of capital stock.” The provisions of our amended and restated certificate of incorporation and by-laws and the ability of our board of directors to create and issue a new series of preferred stock or a stockholder rights plan could discourage potential takeover attempts and reduce the price that investors might be willing to pay for shares of our common stock in the future which could reduce the market price of our stock.

Failure to maintain effective internal controls over financial reporting could have an adverse effect on our business, operating results and stock price.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. The requirements of Section 404 of Sarbanes-Oxley and the related rules of the Securities and Exchange Commission (“SEC”) require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to issue a report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2014. In the future, we may identify deficiencies that we may be unable to remedy before the requisite deadline for those reports. Also, our auditors have not yet conducted an audit of our internal control over financial reporting. Any failure to remediate material weaknesses noted by us or our independent registered public accounting firm or to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligation or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information, and the trading price of our common stock could decrease significantly. Failure to comply with Section 404 of Sarbanes-Oxley could potentially subject us to sanctions or investigations by the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”) or other regulatory authorities.

 

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Cautionary note regarding forward-looking statements

This prospectus contains “forward-looking statements.” These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements made in connection with this prospectus that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk factors” and other cautionary statements included in this prospectus. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations, except as required by federal securities laws.

There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by us include, but are not limited to, the following:

 

 

downturns in the home repair and remodeling or the new construction end markets, or the economy or the availability of consumer credit;

 

 

competition from other exterior building products manufacturers and alternative building materials;

 

 

changes in the costs and availability of raw materials;

 

 

consolidation and further growth of our customers;

 

 

loss of, or a reduction in orders from, any of our significant customers;

 

 

inclement weather conditions;

 

 

increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers;

 

 

our ability to employ, train and retain qualified personnel at a competitive cost;

 

 

claims arising from the operations of our various businesses prior to our acquisitions;

 

 

products liability claims, including class action claims, relating to the products we manufacture;

 

 

loss of certain key personnel;

 

 

interruptions in deliveries of raw materials or finished goods;

 

 

environmental costs and liabilities;

 

 

manufacturing or assembly realignments;

 

 

threats to, or impairments of, our intellectual property rights;

 

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increases in fuel costs;

 

 

material non-cash impairment charges;

 

 

our significant amount of indebtedness;

 

 

covenants in the ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes;

 

 

failure to effectively manage labor inefficiencies associated with increased productions and new employees added to the company;

 

 

failure to generate sufficient cash to service all of our indebtedness and make capital expenditures;

 

 

limitations on our NOLs and payments under the tax receivable agreement to our current stockholders;

 

 

failure to successfully consummate and integrate future acquisitions;

 

 

actual or perceived security vulnerabilities or cyberattacks on our networks;

 

 

control by the CI Partnerships;

 

 

compliance with certain corporate governance requirements;

 

 

certain of our directors’ relationships with the CI Partnerships;

 

 

lack of a prior public market for our common stock and volatility of our stock price;

 

 

future sales of our common stock in the public market;

 

 

substantial dilution in net tangible book value;

 

 

our dividend policy;

 

 

provisions in our charter and by-laws; and

 

 

failure to maintain internal controls over financial reporting.

These and other factors are more fully discussed in the “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” sections and elsewhere in this prospectus. These risks could cause actual results to differ materially from those implied by forward-looking statements in this prospectus.

 

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Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $277.0 million, after deducting the underwriting discount and estimated offering expenses payable by us, assuming the underwriters’ over-allotment option is not exercised. If the underwriters’ over-allotment option is exercised in full, we estimate that the net proceeds to us from this offering will be approximately $319.0 million. These estimates are based on an assumed offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus). There can be no assurance as to whether or not the underwriters will exercise their over-allotment option.

The following table sets forth the estimated sources and uses of funds in connection with this offering and the other transactions described below as if they had occurred on March 30, 2013 and assuming no exercise of the underwriters’ over-allotment option. Actual amounts may vary. See also “Unaudited pro forma financial information.”

 

Sources of funds (in millions)          Uses of funds (in millions)       

Common stock offered hereby, net of underwriting discount

  $ 300.0     

Redeem or repurchase 8.25% Senior Secured Notes(1)

  $ 86.5   
   

Redeem or repurchase 9.375% Senior Notes(2)

    70.0   
    Repay ABL Facility(3)     21.0   
    Transaction fees and expenses(4)     40.5   
           

General corporate purposes (including the acquisition of Mitten(5)

    82.0   

    Total sources

  $ 300.0          Total uses   300.0      

 

 

 

(1)   We intend to use a portion of the proceeds from this offering to redeem or repurchase a portion of our 8.25% Senior Secured Notes, including to pay a call premium of approximately $2.5 million. The 8.25% Senior Secured Notes bear interest at a rate of 8.25% per annum and mature on February 15, 2018. For a description of the terms of the 8.25% Senior Secured Notes, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—8.25% Senior Secured Notes due 2018.

 

(2)   We intend to use a portion of the proceeds from this offering to redeem or repurchase a portion of our 9.375% Senior Notes, including to pay a call premium of approximately $6.0 million. The 9.375% Senior Notes bear interest at a rate of 9.375% per annum and mature on April 15, 2017. The 9.375% Senior Notes were issued on September 27, 2012 and the proceeds from the issuance of such notes were used to redeem all of our outstanding 13.125% Senior Subordinated Notes and to pay related costs and expenses. For a description of the terms of the 9.375% Senior Notes, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—9.375% Senior Notes due 2017.

 

(3)   We intend to use a portion of the proceeds from this offering to repay approximately $21.0 million of our indebtedness outstanding under the ABL Facility. Borrowings under the ABL Facility bear interest at a rate per annum at March 30, 2013 equal to 2.5% and are due and payable in full on January 26, 2016. For a description of the terms of the ABL Facility, see “Management’s discussion and analysis of financial condition and results of operations—Senior Secured Asset-Based Revolving Credit Facility due 2016.”

 

(4)   This amount includes (i) approximately $23.0 million of estimated expenses associated with this offering and (ii) a termination fee equal to $17.5 million payable to an affiliate of the CI Partnerships in connection with the termination of an advisory agreement.

 

(5)   We intend to use a portion of the proceeds from this offering to pay the aggregate purchase price of approximately CAD $82.0 million to acquire all of the issued and outstanding capital stock of Mitten. We intend to use any remaining proceeds for general corporate purposes. See “Prospectus summary—Recent developments.

A $1.00 increase (decrease) in the assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus) would increase (decrease) the amount of net proceeds from this offering available to us by $         million, assuming the number of shares offered by us, as set forth on the cover page of this

 

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prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. To the extent that the public offering price exceeds or is less than $        per share, the amount of indebtedness to be repaid under the ABL Facility will be increased or decreased accordingly.

Prior to their final application, we may hold any net proceeds in cash or invest them in liquid short- and medium-term securities.

 

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Dividend policy

We paid cash dividends to our parent of approximately $14.0 million and $3.0 million in the fiscal years ended December 31, 2011 and 2010, respectively, for equity repurchases, but have not otherwise paid any dividends since our inception in 2004. For the foreseeable future, we intend to retain any earnings to finance our business and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions (including restrictions contained in the ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes), business prospects and other factors that our board of directors considers relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of March 30, 2013:

 

 

on an actual basis, and

 

 

on a pro forma basis, giving effect to the following transactions as if they occurred on March 30, 2013:

 

  (i)   the Reorganization Transactions;

 

  (ii)   the creation of liabilities in connection with entering into the tax receivable agreement;

 

  (iii)   the sale of                          shares of our common stock in this offering at an assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us; and

 

  (iv)   the application of the net proceeds of this offering as described in “Use of proceeds.”

You should read the following table in conjunction with “Unaudited pro forma financial information,” “Selected historical consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

 

(amounts in thousands)    As of March 30, 2013  
   Actual     Pro forma(4)  

 

 
           (unaudited)  

Cash and cash equivalents

   $ 11,162      $ 93,162   
  

 

 

 

Long-term debt:

    

ABL Facility(1)

   $ 65,000      $ 44,027   

8.25% Senior Secured Notes due 2018(2)

     800,714        720,642   

9.375% Senior Notes due 2017(3)

     150,542        90,326   
  

 

 

 

Total long-term debt

   $ 1,016,256      $ 854,995   
  

 

 

 

Stockholder’s deficit:

    

Common stock

   $      $     

Additional paid-in capital

     311,490     

Accumulated deficit

     (647,747  

Accumulated other comprehensive loss

     (7,104  
  

 

 

 

Total stockholder’s deficit

   $ (343,361   $     
  

 

 

 

Total capitalization

   $ 906,116      $     

 

 

 

(1)   Borrowings under the ABL Facility are limited to the lesser of the borrowing base, as defined therein, or $212.5 million. As of March 30, 2013, we had approximately $141.1 million of contractual availability under the ABL Facility, which was limited by the borrowing base availability to approximately $97.1 million, after giving effect to $65.0 million of borrowings outstanding and approximately $6.4 million of letters of credit and priority payables reserves.

 

(2)   Consists of $800.0 million of 8.25% Senior Secured Notes issued in February 2011 and $40.0 million of 8.25% Senior Secured Notes issued in February 2012 (the “Senior Tack-on Notes”), less an amortized tender premium and discount from the purchase and redemption of the 11.75% Senior Secured Notes of approximately $34.2 million and an amortized discount of approximately $5.1 million related to the $40.0 million of Senior Tack-on Notes.

 

(3)   Consists of $160.0 million of 9.375% Senior Notes, less an amortized discount of $9.5 million related to this issuance and the satisfaction, discharge and early redemption of the 13.125% Senior Subordinated Notes.

 

(4)   A $1.00 increase (decrease) in the assumed public offering price of $              per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase (decrease) each of additional paid-in capital, total stockholder’s deficit and total capitalization by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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Dilution

If you invest in our common stock, you will be diluted to the extent the initial public offering price per share of our common stock exceeds the pro forma net tangible book value per share of our common stock immediately after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing equity holders.

Our pro forma net tangible book value as of March 30, 2013 was approximately $        million, or $        per share of common stock. Pro forma net tangible book value per share represents the amount of our pro forma tangible net worth, or total tangible assets less total liabilities, divided by                 shares of our common stock outstanding as of that date, after giving effect to the Reorganization Transactions, and the creation of liabilities in connection with entering into the tax receivable agreement.

After giving effect to (i) the Reorganization Transactions, (ii) the issuance and sale of                 shares of our common stock sold by us in this offering and our receipt of approximately $277.0 million in net proceeds from such sale, based on an assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us and (iii) the application of such net proceeds as discussed under “Use of proceeds,” our pro forma as adjusted net tangible book value per share as of March 30, 2013 would have been approximately $        million, or $        per share. This amount represents an immediate increase in pro forma net tangible book value of $        to existing stockholders and an immediate dilution in pro forma net tangible book value of $        per share to new investors purchasing shares of our common stock in this offering. Dilution per share is determined by subtracting the pro forma net tangible book value per share as adjusted for this offering from the amount of cash paid by a new investor for a share of our common stock. The following table illustrates the per share dilution:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value per share as of March 30, 2013 before giving effect to the tax receivable agreement

   $                

Effect of the tax receivable agreement

   $                
  

 

 

 

Pro forma net tangible book value per share before the change attributable to new investors

   $                

Increase in net tangible book value per share attributable to new investors

   $                
  

 

 

 

Pro forma as adjusted net tangible book value per share after this offering

   $                
  

 

 

 

Dilution per share to new investors

   $                

 

 

A $1.00 increase (decrease) in the assumed public offering price of $        per share (the midpoint of the estimated public offering price range set forth in the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value by $        , the pro forma as adjusted net tangible book value per share after this offering by $        and the dilution per share to new investors by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The foregoing discussion and table do not give effect to the shares of our common stock that we will issue if the underwriters exercise their over-allotment option.

 

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If the underwriters exercise their over-allotment in full, assuming a public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), our pro forma as adjusted net tangible book value per share as of March 30, 2013 would have been approximately $         per share, representing an increase to our existing stockholders of $         per share, and there will be an immediate dilution of $         per share to new investors.

The following table presents on the same pro forma basis as of March 30, 2013 the differences between the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering, before deducting the underwriting discount and estimated offering expenses payable by us:

 

Number  

Shares purchased

    Total consideration    

Average

price

per share

 
  Number    Percent     Amount      Percent    

 

   

 

 

    

 

 

   

 

 

 

Existing stockholders

              $                         $            

New investors

           
 

 

 

Total

       100.0   $           100.0   $            

 

 

The foregoing tables do not include outstanding options to purchase an aggregate of              shares of common stock under our 2004 Option Plan or shares of common stock issuable upon the vesting of approximately $2.8 million of awards under our LTIP, which number of shares will be determined based on the value of our shares on the relevant vesting date. See “Shares available for future sale—Options/equity awards.” As of March 30, 2013, after giving effect to the Reorganization Transactions, there were                 options outstanding at a weighted average exercise price of $        per share pursuant to the 2004 Option Plan. To the extent that any of these options are exercised, there would be further dilution to new investors. If all of these options had been exercised as of March 30, 2013, pro forma net tangible book value per share would have been $        and total dilution per share to new investors, on a pro forma basis, would have been $        or        %, assuming no exercise of the underwriters’ over-allotment option.

 

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Unaudited pro forma consolidated financial information

The historical financial information of Ply Gem Holdings for the year ended December 31, 2012 was derived from our audited consolidated financial statements and accompanying notes included elsewhere in this prospectus. The historical financial information of Ply Gem Holdings as of and for the three months ended March 30, 2013 was derived from our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this prospectus. The historical financial information of Ply Gem Prime as of December 31, 2012 and for the year ended December 31, 2012 and as of March 30, 2013 and for the three months ended March 30, 2013 is unaudited. For financial reporting purposes, the consolidated operating assets and liabilities of Ply Gem Prime were the same as Ply Gem Holdings as of December 31, 2012 and for all previous years since inception.

The Reorganization Transactions include the merger of Ply Gem Holdings with its parent company, Ply Gem Prime, which will ultimately result in the conversion of Ply Gem Prime’s common stock, preferred stock and subordinated debt due to related parties into shares of Ply Gem Holdings’ common stock. See “Certain relationships and related party transactions— Reorganization transactions” for further details of the Reorganization Transactions. The pro forma consolidated financial information reflects the consolidation of Ply Gem Prime and Ply Gem Holdings and also gives effect to the Reorganization Transactions and certain transactions that will occur in connection with this offering.

The unaudited pro forma consolidated balance sheet data as of March 30, 2013 gives effect to the following transactions as if they occurred on March 30, 2013: (i) the Reorganization Transactions; (ii) the creation of liabilities in connection with entering into the tax receivable agreement; (iii) the sale of                 shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; (iv) the application of the net proceeds of this offering as described in “Use of proceeds;(v) the write-off of approximately $3.0 million of debt issuance costs and $7.7 million of debt discounts/tender premiums and the related tax benefit, net of valuation allowances, of approximately $        million attributable to the 9.375% Senior Notes and the 8.25% Senior Secured Notes redeemed and/or repurchased with the proceeds from this offering; and (vi) a $8.5 million write-off related to call premiums, if applicable, associated with the redemption and/or repurchase of a portion of the 9.375% Senior Notes and a portion of the 8.25% Senior Secured Notes as described under “Use of proceeds.”

The unaudited pro forma consolidated statement of operations data for the three months ended March 30, 2013 and for the year ended December 31, 2012 gives effect to the following transactions as if they occurred on January 1, 2012: (i) the Reorganization Transactions; (ii) the sale of          shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of the net proceeds of this offering as described under “Use of proceeds.”

The unaudited pro forma financial information included in this prospectus does not give pro forma effect to the acquisition of Gienow in April 2013 or the anticipated acquisition of Mitten because these acquisitions were not deemed to be significant. See “Prospectus summary—Recent developments.

 

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In connection with this offering and the related transactions, we will record as one-time charges in our consolidated statement of operations at the time of the respective transactions the write-off of approximately $3.0 million of debt issuance costs, $7.7 million of debt discounts/tender premiums, and $8.5 million of call premiums, if applicable, net of tax impact of $        million, attributable to the redemption and/or repurchase of a portion of the 9.375% Senior Notes and a portion of the 8.25% Senior Secured Notes with a portion of the proceeds from this offering. In addition, we will incur a $2.9 million write-off of a prepaid asset related to an advisory agreement with an affiliate of the CI Partnerships that will be terminated in connection with the offering. Finally, we will incur a $1.5 million expense related to a bonus to our President and Chief Executive Officer in connection with a successful offering prior to December 31, 2013 in lieu of benefits he would have received under the tax receivable agreement. Because these charges are non-recurring in nature, we have not given effect to these transactions in the pro forma consolidated statement of operations. However, these items are reflected as pro forma adjustments to accumulated deficit in the consolidated balance sheet as of March 30, 2013.

The presentation of the unaudited pro forma consolidated financial information is prepared in conformity with Article 11 of Regulation S-X. The unaudited pro forma consolidated financial information has been prepared by our management and is based on our historical financial statements and the assumptions and adjustments described in the notes to the unaudited pro forma consolidated financial information below.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances. See “—Notes to unaudited pro forma consolidated financial information” for a discussion of assumptions made. The unaudited pro forma consolidated financial information is presented for informational purposes and is based on management’s estimates. The unaudited pro forma consolidated statement of operations does not purport to represent what our results of operations actually would have been if the transactions set forth above had occurred on the dates indicated or what our results of operations will be for future periods.

 

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Ply Gem Holdings, Inc.

Unaudited pro forma consolidated balance sheet

as of March 30, 2013

 

     Historical            Consolidated
pro forma
adjustments
after
reorganization
    Offering
pro forma
adjustments
    Consolidated
pro forma
 
(amounts in thousands (except per share data))   Ply Gem
Holdings
    Ply Gem
Prime
Holdings
    Eliminations     Consolidated     Reorganization
pro forma
adjustments
       

 

 

ASSETS

               

Current Assets:

               

Cash and cash equivalents

  $ 11,162      $      $      $ 11,162      $      $      $ 82,000      $                    

Accounts receivable

    136,553                      136,553                          

Inventories:

               

Raw materials

    51,626                      51,626                          

Work in process

    25,205                      25,205                          

Finished goods

    45,879                      45,879                          
 

 

 

 

Total inventory

    122,710                      122,710                          

Prepaid expenses and other current assets

    16,061                      16,061        (2,857 )(h)      (2,857     (324) (i)   

Deferred income taxes

    5,224                      5,224              (a)   
 

 

 

 

Total current assets

    291,710                      291,710        (h      

Property and Equipment, at cost:

               

Land

    3,737                      3,737                          

Buildings and improvements

    38,422                      38,422                          

Machinery and equipment

    299,242                      299,242                          
 

 

 

 

Total property and equipment

    341,401                      341,401                          

Less accumulated depreciation

    (241,050                   (241,050                       
 

 

 

 

Total property and equipment, net

    100,351                      100,351                          

Other Assets:

               

Intangible assets, net

    90,153                      90,153                          

Goodwill

    392,224                      392,224                          

Deferred income taxes

    2,871                      2,871              (a)   

Investment in Ply Gem Holdings

           (343,361     343,361                                 

Other

    28,807                      28,807                      (3,013) (b)   
 

 

 

 

Total other assets

    514,055        (343,361     343,361        514,055           
 

 

 

 
  $ 906,116      $ (343,361   $ 343,361      $ 906,116      $ (2,857   $ (2,857   $ 78,663      $                    
 

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

               

Current Liabilities:

               

Accounts payable

  $ 79,582      $      $      $ 79,582      $      $      $      $                    

Accrued expenses

    79,918                      79,918            1,500 (a),(j)   
 

 

 

 

Total current liabilities

    159,500                      159,500           

Deferred income taxes

    13,002                      13,002              (a)   

Other long-term liabilities

    60,719                      60,719        86,814 (c)      86,814            

Long-term debt due to related parties

           165,180               165,180        (e      

Long-term debt

    1,016,256                      1,016,256                      (161,261) (d)   

Commitments and contingencies

               

Stockholder’s Deficit:

               

Preferred stock

           133,357               133,357        (e      

Common stock

           44               44        (e         (g)   

Additional paid-in-capital

    311,490        102,973        (311,490     102,973        (86,814 )(c),(e)      (86,814     259,169 (g)   

Accumulated deficit

    (647,747     (737,811     647,747        (737,811     (2,857 )(e)      (2,857     (20,745) (f),(j)   

Accumulated other comprehensive income (loss)

    (7,104     (7,104     7,104        (7,104                       
 

 

 

 

Total stockholder’s deficit

    (343,361     (508,541     343,361        (508,541     (89,671     (89,671     238,424     
 

 

 

 
  $ 906,116      $ (343,361   $ 343,361      $ 906,116      $ (2,857   $ (2,857   $ 78,663      $     

 

 

See accompanying notes to the unaudited pro forma financial information.

 

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Ply Gem Holdings, Inc.

Unaudited pro forma consolidated statement of operations

for the three months ended March 30, 2013

 

     Historical    

Reorganization

pro forma

adjustments

   

Offering

pro forma

adjustments

        
    Ply Gem     Ply Gem Prime                     Consolidated  
(amounts in thousands (except per share data))   Holdings     Holdings     Eliminations     Consolidated         pro forma  

 

   

 

 

   

 

 

   

 

 

 

Net sales

  $ 257,097      $      $      $ 257,097      $      $      $                        

Cost of products sold

    215,251                      215,251                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    41,846                      41,846                   

Operating expenses:

             

Selling, general and administrative expenses

    38,216                      38,216                   

Amortization of intangible assets

    4,202                      4,202                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    42,418                      42,418                   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (572                   (572                

Foreign currency loss

    (33                   (33                

Interest expense

    (23,668     (4,029 )(1)             (27,697            4,033 (2)   

Interest income

    15                      15                   

Gain (loss) on modification or extinguishment of debt

                                           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before equity in loss of subsidiary

    (24,258     (4,029            (28,287            4,033 (2)   

Equity in loss of subsidiary

           (28,107     28,107                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (24,258     (32,136     28,107        (28,287            4,033 (2)   

Provision for income taxes

    3,849                      3,849               (3)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Ply Gem Holdings, Inc.

  $ (28,107   $ (32,136   $ 28,107      $ (32,136   $        $        $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

             

Basic earnings per share

              $     
             

 

 

 

Diluted earnings per share

              $     
             

 

 

 

Weighted average shares outstanding:

             

Basic weighted average shares

                                     (4) 
           

 

 

 

Diluted weighted average shares

                     (5) 

 

 

 

 

 

See accompanying notes to the unaudited pro forma financial information.

 

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Ply Gem Holdings, Inc.

Unaudited pro forma consolidated statement of operations

for the year ended December 31, 2012

 

     Historical    

Reorganization

pro forma
adjustments

   

Offering

pro forma
adjustments

   

Consolidated

pro forma

 
(amounts in thousands (except per share data))   Ply Gem
Holdings
   

Ply Gem

Prime

Holdings

    Eliminations     Consolidated        

 

 

Net sales

  $ 1,121,301      $      $      $ 1,121,301      $      $      $                        

Cost of products sold

    877,102                      877,102                   
 

 

 

 

Gross profit

    244,199                      244,199                   

Operating expenses:

             

Selling, general and administrative expenses

    147,242                      147,242                   

Amortization of intangible assets

    26,937                      26,937                   
 

 

 

 

Total operating expenses

    174,179                      174,179                   
 

 

 

 

Operating earnings

    70,020                      70,020                   

Foreign currency gain

    409                      409                   

Interest expense

    (103,133     (14,951 )(1)             (118,084            10,128 (2)   

Interest income

    91                      91                   

Loss on modification or extinguishment of debt

    (3,607                   (3,607                
 

 

 

 

Loss before equity in loss of subsidiary

    (36,220     (14,951            (51,171            10,128 (2)   

Equity in loss of subsidiary

           (39,055     39,055                          
 

 

 

 

Loss before provision for income taxes

    (36,220     (54,006     39,055        (51,171            10,128 (2)   

Provision for income taxes

    2,835                      2,835               (3)   
 

 

 

 

Net loss attributable to Ply Gem Holdings, Inc.

  $ (39,055   $ (54,006   $ 39,055      $ (54,006   $        $        $     
 

 

 

 

Earnings per share:

             

Basic earnings per share

              $     
             

 

 

 

Diluted earnings per share

              $     
             

 

 

 

Weighted average shares outstanding:

             

Basic weighted average shares

                     (4) 
             

 

 

 

Diluted weighted average shares

                                                         (5) 

See accompanying notes to the unaudited pro forma financial information.

 

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Notes to unaudited pro forma consolidated financial information

Pro forma adjustments

Balance sheet as of March 30, 2013

(a) Reflects the income tax benefit, net of valuation allowances, resulting from the write-off of debt issuance costs, debt discounts, tender premiums and call premiums paid in connection with the debt repayment with the proceeds from this offering.

(b) Reflects the write-off of approximately $3.0 million of debt issuance costs attributable to the outstanding 8.25% Senior Secured Notes and 9.375% Senior Notes redeemed and/or repurchased with the proceeds from this offering.

(c) Reflects adjustments to record a $86.8 million liability related to our tax receivable agreement with the Tax Receivable Entity. Under this tax receivable agreement, we are required to pay the Tax Receivable Entity 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize in periods after this offering as a result of (i) net operating loss carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to this offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of this tax receivable agreement. The tax receivable liability was recorded at its gross value with an increase in other long-term liabilities and a reduction in additional paid-in capital.

(d) Reflects the application of a portion of the proceeds from this offering, after deducting the underwriting discounts and commissions and estimated offering expenses, to repay, redeem and/or repurchase a portion of the 8.25% Senior Secured Notes, a portion of the 9.375% Senior Notes and approximately $21.0 million of the indebtedness outstanding under the ABL Facility as described under “Use of proceeds.”

(e) Reflects the Reorganization Transactions, including the conversion of preferred stock and long-term debt due to related parties of Ply Gem Prime into shares of common stock of Ply Gem Holdings and the exchange of common stock of Ply Gem Prime for common stock of Ply Gem Holdings. The Reorganization Transactions will create one class of stock outstanding, which will be the common stock of Ply Gem Holdings. The long-term debt due to a related party matures in February 2015 and bears interest at 10% per annum.

(f) Reflects the recognition of a charge attributable to the write-off of approximately $3.0 million of unamortized debt issuance costs, $7.7 million of debt discounts/tender premiums and $8.5 million of call premiums, if applicable, net of tax impact of $             million, attributable to the redemption and/or repurchase of a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes with a portion of the proceeds from this offering.

(g) Reflects the offering of              shares of common stock in exchange for net proceeds of approximately $277.0 million, a portion of which will be utilized to repurchase and/or redeem a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes and repay approximately $21.0 million of the indebtedness outstanding under the ABL Facility as described under “Use of proceeds.”

(h) Reflects the $2.9 million write-off of a prepaid asset related to an advisory agreement with an affiliate of the CI Partnerships that will be terminated in connection with the offering. The advisory fee written off was for the year ending December 31, 2013.

(i) Reflects the $0.3 million of capitalized offering costs that will be offset against additional paid in capital in the offering.

(j) Reflects the $1.5 million bonus expense to the President and Chief Executive Officer in connection with the offering.

 

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For the three months ended March 30, 2013 and for the year ended December 31, 2012

(1) The interest expense for long-term debt due to related parties of Ply Gem Prime reflected on Ply Gem Prime’s statements of operations will not be recurring in the future as the debt to which this interest relates will be converted into outstanding common stock of Ply Gem Holdings in the Reorganization Transactions eliminating any future interest expense for Ply Gem Prime. Ply Gem Prime’s unaudited historical financial results for 2011 and 2010 are contained in the following tables:

Ply Gem Prime Holdings, Inc.

Unaudited consolidated balance sheets

 

(amounts in thousands)    December 31,
2011
    December 31,
2010
 

 

 

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $      $   

Accounts receivable

              

Inventories

              

Prepaid expenses and other current assets

              

Deferred income taxes

              
  

 

 

   

 

 

 

Total current assets

              

Property and equipment, net

              

Other Assets:

    

Intangibles

    

Goodwill

              

Deferred income taxes

              

Investment in Ply Gem Holdings

     (277,322     (173,088

Other

              
  

 

 

   

 

 

 

Total other assets

     (277,322     (173,088
  

 

 

   

 

 

 
   $ (277,322   $ (173,088
  

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIT

    

Current Liabilities:

    

Accounts payable

   $      $   

Accrued expenses

              
  

 

 

   

 

 

 

Total current liabilities

              

Deferred income taxes

              

Other long term liabilities

              

Long-term debt due to related parties

     146,201        132,608   

Long-term debt

              

Commitments and contingencies

    

Stockholder’s Deficit:

    

Preferred stock

     133,358        133,358   

Common stock

     44        44   

Additional paid-in-capital

     100,813        113,249   

Accumulated deficit

     (651,669     (553,570

Accumulated other comprehensive income (loss)

     (6,068     1,223   
  

 

 

   

 

 

 

Total stockholder’s deficit

     (423,522     (305,696
  

 

 

   

 

 

 
   $ (277,322   $ (173,088

 

 

 

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Ply Gem Prime Holdings, Inc.

Unaudited consolidated statements of operations

 

(amounts in thousands)    For the year ended  
   December 31,
2011
    December 31,
2010
 

 

 

Net sales

   $      $   

Cost of products sold

              
  

 

 

   

 

 

 

Gross profit

              

Operating expenses:

    

Selling, general and administrative expenses

            1,600   

Amortization of intangible assets

              
  

 

 

   

 

 

 

Total operating expenses

            1,600   
  

 

 

 

Operating loss

            (1,600

Interest expense

     (13,592     (12,329

Interest income

            9,848   
  

 

 

   

 

 

 

Income (loss) before equity in subsidiary income (loss)

     (13,592     (4,081

Equity in subsidiary’s income (loss)

     (84,507     27,667   
  

 

 

 

Income (loss) before provision for income taxes

     (98,099     23,586   

Provision for income taxes

            1,531   
  

 

 

   

 

 

 

Net income (loss)

   $ (98,099   $ 22,055   

 

  

 

 

   

 

 

 

(2) Reflects the reduction of interest expense and amortization of debt issuance costs as a result of the redemption and/or repurchase of a portion of the 8.25% Senior Secured Notes and a portion of the 9.375% Senior Notes and the repayment of approximately $21.0 million of the indebtedness outstanding under the ABL Facility as described under “Use of proceeds.”

(3) Reflects the incremental provision for federal and state income taxes as a result of the pro forma adjustments.

(4) The pro forma basic weighted average common shares outstanding reflect the issuance of shares of common stock issued in connection with the following transactions as if such shares had been issued on January 1, 2012:

(i) The Reorganization Transactions;

(ii) The sale of                 shares of our common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the underwriting discount and estimated offering expenses payable by us; and

(iii) The application of the net proceeds of this offering as described in “Use of proceeds.”

 

    

Three months ended

March 30, 2013

 

Reorganization Transactions

 

Shares of common stock issued in this offering

 

Pro forma basic weighted average shares outstanding

 

 

  

 

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Year ended

December 31, 2012

 

Reorganization Transactions

 

Shares of common stock issued in this offering

 

Pro forma basic weighted average shares outstanding

 

 

  
(5)   The pro forma diluted weighted average common shares outstanding reflect the treasury stock effect of the outstanding stock options. In connection with the Reorganization Transactions, options to purchase shares of common stock of Ply Gem Prime will be converted into options to purchase shares of common stock of Ply Gem Holdings with adjustments to the number of shares and per share exercise prices.

 

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Selected historical consolidated financial data

You should read the information set forth below in conjunction with “Capitalization,” “Unaudited pro forma financial information,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The selected historical consolidated financial data presented below under the captions “Selected statements of operations data,” “Selected statements of cash flows data” and “Selected balance sheet data” as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, are derived from the consolidated financial statements of Ply Gem Holdings and subsidiaries, which financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. The consolidated financial statements as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, and the report thereon, are included elsewhere in the prospectus. The consolidated balance sheets as of December 31, 2010, 2009 and 2008, and the consolidated financial statements for each of the years in the two year period ended December 31, 2009, have been derived from our audited financial statements that are not included in this prospectus.

The selected historical consolidated financial data presented below as of and for the three month periods ended March 30, 2013 and March 31, 2012 have been derived from, and should be read together with, the unaudited condensed consolidated financial statements of Ply Gem Holdings and subsidiaries included elsewhere in this prospectus and have been prepared on the same basis as the audited consolidated financial statements of Ply Gem Holdings and subsidiaries. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial position and results of operations in these periods. The results of any interim period are not necessarily indicative of the results that can be expected for the full year or any future period.

 

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The selected historical consolidated financial data set forth below is not necessarily indicative of the results of future operations.

 

(amounts in thousands (except per share
data))
  Three months ended     Year ended December 31,  
  March 30,
2013
   

March 31,

2012

    2012     2011     2010     2009     2008  

 

   

 

 

 
    (unaudited)     (unaudited)                                

Selected statements of operations data:(1)

             

Net sales

  $ 257,097      $ 239,176      $ 1,121,301      $ 1,034,857      $ 995,906      $ 951,374      $ 1,175,019   

Cost of products sold

    215,251        196,261        877,102        824,325        779,946        749,841        980,098   
 

 

 

 

Gross profit

    41,846        42,915        244,199        210,532        215,960        201,533        194,921   

Operating expenses:

             

Selling, general and administrative expenses

    38,216        34,993        147,242        138,912        130,460        141,772        155,388   

Amortization of intangible assets

    4,202        6,719        26,937        26,689        27,099        19,651        19,650   

Write-off of previously capitalized offering costs

                                1,571                 

Goodwill impairment

                                              450,000   
 

 

 

 

Total operating expenses

    42,418        41,712        174,179        165,601        159,130        161,423        625,038   
 

 

 

 

Operating earnings (loss)

    (572     1,203        70,020        44,931        56,830        40,110        (430,117

Foreign currency gain (loss)

    (33     68        409        492        510        475        (911

Interest expense(2)

    (23,668     (25,056     (103,133     (101,488     (122,992     (135,514     (138,015

Interest income

    15        15        91        104        159        211        617   

Gain (loss) on modification or extinguishment of debt(2)

                  (3,607     (27,863     98,187                 
 

 

 

 

Income (loss) before provision (benefit) for income taxes

    (24,258     (23,770     (36,220     (83,824     32,694        (94,718     (568,426

Provision (benefit) for income taxes

    3,849        1,872        2,835        683        5,027        (17,966     (69,951
 

 

 

 

Net income (loss)

    (28,107     (25,642   $ (39,055   $ (84,507   $ 27,667      $ (76,752   $ (498,475
 

 

 

 

Dividends(8)

                                                

Basic and diluted earnings (loss) attributable to common stockholders per common share

  $ (281,070   $ (256,420   $ (390,550   $ (845,070   $ 276,670      $ (767,520   $ (4,984,750

Pro forma earnings per share:(3)(4)

             

Basic earnings per share

  $          $             

Diluted earnings per share

  $          $             

Pro forma weighted average shares outstanding:

             

Basic weighted average shares outstanding

             

Diluted weighted average shares outstanding

             

Other data:

             

Adjusted EBITDA(5)

  $ 12,073      $ 15,267      $ 127,262      $ 114,501      $ 123,054      $ 116,215      $ 96,095   

Capital expenditures

    6,665        3,350        24,646        11,490        11,105        7,807        16,569   

Depreciation and amortization

    9,715        13,317        52,277        54,020        60,718        56,271        61,765   

Annual single family housing starts(6)

    N/A        N/A        535        434        471        442        616   

Selected statements of cash flows data:

             

Net cash provided by (used in):

             

Operating activities

  $ (59,414   $ (36,515   $ 48,704      $ (3,459   $ 6,748      $ (16,882   $ (58,865

Investing activities

    (6,654     (3,229     (24,553     (11,388     (9,073     (7,835     (11,487

Financing activities

    49,938        48,134        (8,813     9,198        2,407        (17,528     78,233   

Selected balance sheet data (at period end):

             

Cash and cash equivalents

  $ 11,162      $ 20,197      $ 27,194      $ 11,700      $ 17,498      $ 17,063      $ 58,289   

Total assets

    906,116        923,030        881,850        892,912        922,237        982,033        1,104,053   

Total long-term debt

    1,016,256        1,012,323        964,384        961,670        894,163        1,100,397        1,114,186   

Stockholder’s deficit

    (343,361     (301,907     (314,942     (277,322     (173,088     (313,482     (242,628

 

 

 

(1)   In April 2012, we adopted the financial presentation provision of Accounting Standard Update 2011-05, Presentation of Comprehensive Income. We adopted the measurement provisions in 2008 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) (now included in Accounting Standards Codification (ASC) 715, Compensation—Retirement Benefits). In addition, we elected to change our method of accounting for a portion of our inventory in 2008 from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

 

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(2)   During the year ended December 31, 2012, we incurred a loss on modification or extinguishment of debt of approximately $3.6 million consisting of $1.5 million in call premiums, $0.4 million expense of unamortized debt issuance costs associated with the 13.125% Senior Subordinated Notes, $0.3 million expense of unamortized discount for the 13.125% Senior Subordinated Notes, and $1.4 million expense of third party fees for the 13.125% Senior Subordinated Notes. During the year ended December 31, 2011, we incurred a loss on modification or extinguishment of debt of approximately $27.9 million consisting of $10.9 million in tender premiums, $2.8 million expense of unamortized debt issuance costs associated with the 11.75% Senior Secured Notes, $0.8 million expense of unamortized discounts for the 11.75% Senior Secured Notes, $12.3 million expense of third party fees for the 8.25% Senior Secured Notes, and $1.2 million for the expense of unamortized debt issuance costs for the previous senior secured asset-based revolving credit facility. During the year ended December 31, 2010, we recorded a non-cash gain on extinguishment on debt of approximately $98.2 million in connection with the redemption of the 9% Senior Subordinated Notes arising from a net reacquisition price of approximately $261.8 million versus the carrying value of the 9% Senior Subordinated Notes of $360.0 million. During the year ended December 31, 2008, we classified extinguishment losses arising from $14.0 million of non-cash deferred financing costs associated with previous term debt, $6.8 million for a prepayment premium and $6.8 million of bank amendment fees as interest expense.

 

(3)   Reflects the Reorganization Transactions, this offering and the application of the net proceeds from this offering as described in “Use of proceeds.”

 

       The following details the computation of the pro forma earnings per common share and is unaudited:

 

(amounts in thousands (except per share data))   

Three months ended
March 30, 2013

   

Year ended

December 31, 2012

 

 

 

Net loss

   $ (28,107   $ (39,055

Unaudited pro forma weighted average common share calculation:

    

Conversion of Ply Gem Prime Holdings common stock

    

Conversion of Ply Gem Prime Holdings preferred stock

    

Unaudited basic pro forma weighted average shares outstanding

    

Treasury stock effect of outstanding stock options

    

Unaudited diluted pro forma weighted average shares outstanding

    

Pro forma earnings per common share:

    

Pro forma basic earnings per common share

    

Pro forma diluted earnings per common share

    

 

 

 

(4)   The summary unaudited pro forma financial data are based upon available information and certain assumptions as discussed in the notes to the unaudited pro forma financial information presented under “Unaudited pro forma financial information.” The summary unaudited pro forma financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if each such transaction had occurred on the dates specified, nor does this data purport to represent the results of operations for any future period.

 

(5)   Adjusted EBITDA means net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash foreign currency transactions gain/(loss), non-cash loss (gain) on modification or extinguishment of debt, amortization of non-cash write-off of the portion of excess purchase price from acquisitions allocated to inventories, write-off of previously capitalized offering costs, environmental remediation, restructuring and integration expenses, acquisition costs, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships. Other companies may define adjusted EBITDA differently and, as a result, our measure of adjusted EBITDA may not be directly comparable to adjusted EBITDA of other companies. Management believes that the presentation of adjusted EBITDA included in this prospectus provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. We have included adjusted EBITDA because it is a key financial measure used by management to (i) internally measure our operating performance and (ii) determine our incentive compensation programs. In addition, our ABL Facility has certain covenants that apply ratios utilizing this measure of adjusted EBITDA.

 

       Despite the importance of this measure in analyzing our business, measuring and determining incentive compensation and evaluating our operating performance, as well as the use of adjusted EBITDA measures by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP; nor is adjusted EBITDA intended to be a measure of liquidity or free cash flow for our discretionary use. Some of the limitations of adjusted EBITDA are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements to service interest or principal payments under the 9.375% Senior Notes, the 8.25% Senior Secured Notes, the 11.75% Senior Secured Notes, the 13.125% Senior Subordinated Notes or the ABL Facility;

 

   

Adjusted EBITDA does not reflect income tax payments we are required to make; and

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements.

 

       Adjusted EBITDA included in this prospectus should be considered in addition to, and not as a substitute for, net earnings or operating earnings in accordance with U.S. GAAP as a measure of performance in accordance with U.S. GAAP. You are cautioned not to place undue reliance on adjusted EBITDA. The adjusted EBITDA amounts are unaudited.

 

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       The following table presents our calculation of adjusted EBITDA reconciled to net income (loss) and is unaudited:

 

      Three months ended     Year ended December 31,  
(amounts in thousands)    March 30, 2013     March 31, 2012     2012     2011     2010     2009     2008  

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (28,107   $ (25,642     $ (39,055     $ (84,507     $ 27,667        $ (76,752   $ (498,475

Interest expense, net(2)

     23,653        25,041        103,042        101,384        122,833        135,303        137,398   

Provision (benefit) for income taxes

     3,849        1,872        2,835        683        5,027        (17,966     (69,951

Depreciation and amortization

     9,715        13,317        52,277        54,020        60,718        56,271        61,765   

Non-cash loss (gain) on foreign currency transactions

     33        (68     (409     (492     (510     (475     911   

Non-cash (gain) loss on modification or extinguishment of debt(2)

                   3,607        27,863        (98,187              

Non-cash charge of purchase price allocated to inventories

                                               19   

Write-off of previously capitalized offering costs

                                 1,571                 

Restructuring and integration expenses

     2,380               1,677        1,616        910        8,992        10,859   

Acquisition costs

     315                                             

Customer inventory buybacks

            445        768        10,087        574        8,345        1,890   

Goodwill impairment

                                               450,000   

Environmental remediation

                          1,580                        

Management fees(7)

     235        302        2,520        2,267        2,451        2,497        1,679   
  

 

 

 

Adjusted EBITDA

   $ 12,073      $ 15,267      $ 127,262      $ 114,501      $ 123,054      $ 116,215      $ 96,095   

 

 

 

(6)   Single family housing starts data furnished by NAHB forecast (as of April 13, 2013). These amounts are unaudited.

 

(7)   After the completion of this offering, the advisory agreement with an affiliate of the CI Partnerships will be terminated and management fees will no longer be paid.

 

(8)   The Company repurchased equity of $14.0 million and $3.0 million in 2011 and 2010, respectively. These transactions were effected through Ply Gem Holdings’ parent, Ply Gem Prime, and are reflected as equity repurchases in Ply Gem Holdings’ consolidated financial statements.

 

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Management’s discussion and analysis of financial

condition and results of operations

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with our historical financial statements and the related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that involve certain risks and uncertainties. Actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth under “Risk factors” and elsewhere in this prospectus. This historical discussion and analysis of our consolidated financial condition and results of operations does not give effect to the Reorganization Transactions, the entry into the tax receivable agreement, this offering and the application of the net proceeds of this offering as described under “Use of proceeds.”

General

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012 and approximately 54% and 46% of our sales, respectively, for the three months ended March 30, 2013. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers.

Ply Gem Holdings was incorporated on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”). The Ply Gem acquisition was completed on February 12, 2004 for a purchase price, net of cash acquired, of $556.6 million. Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands. Since the Ply Gem acquisition, we have acquired seven additional businesses, and entered into an agreement to acquire one additional business, to complement and expand our product portfolio and geographical diversity. Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand.

The following is a summary of Ply Gem’s acquisition history:

 

 

On August 27, 2004, Ply Gem acquired MWM Holding, a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows, for a purchase price, net of cash acquired, of $330.9 million.

 

 

On February 24, 2006, Ply Gem acquired Alenco, a manufacturer of aluminum and vinyl windows products, for a purchase price, net of cash acquired, of $126.8 million. This acquisition supported our national window strategy and today operates under common leadership with our other U.S. window businesses.

 

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On October 31, 2006, Ply Gem completed the acquisition of MHE, a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories, for a purchase price, net of cash acquired, of $295.9 million. MHE became part of our Siding, Fencing and Stone segment and operates under common leadership with our existing siding business.

 

 

On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Ply Gem Pacific Windows Corporation, a leading manufacturer of premium vinyl windows and patio doors, for a purchase price, net of cash acquired, of $36.6 million.

 

 

On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products, for a purchase price, net of cash acquired, of $3.6 million.

 

 

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck, a composite products development company, for a purchase price of approximately $1.0 million, subject to certain purchase price adjustments.

 

 

On April 9, 2013, Ply Gem acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada, for a purchase price of approximately CAD $21.0 million, subject to certain purchase price adjustments.

 

 

On May 6, 2013, Ply Gem entered into a share purchase agreement to acquire all of the capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada, for a purchase price of approximately CAD $82.0 million, subject to certain purchase price adjustments.

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), which was a wholly owned subsidiary of Ply Gem Prime. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity.

We are a holding company with no operations or assets of our own other than the capital stock of our subsidiaries. The terms of the ABL Facility place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us. Further, the terms of the indentures governing Ply Gem Industries’ 8.25% Senior Secured Notes and 9.375% Senior Notes place restrictions on the ability of Ply Gem Industries and our other subsidiaries to pay dividends and otherwise transfer assets to us.

Financial statement presentation

Net sales.  Net sales represent the fixed selling price of our products plus certain shipping charges less applicable provisions for discounts and allowances. Allowances include cash discounts, volume rebates and returns among others.

Cost of products sold.  Cost of products sold includes direct material and manufacturing costs, manufacturing depreciation, third-party and in-house delivery costs and product warranty expense.

 

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Selling, general and administrative expense.  Selling, general and administrative expense (“SG&A expense”) includes all non-product related operating expenses, including selling, marketing, research and development costs, information technology, restructuring, and other general and administrative expenses.

Operating earnings (loss).  Operating earnings (loss) represents net sales less cost of products sold, SG&A expense, amortization of intangible assets and write-off of previously capitalized offering costs.

Impact of commodity pricing

PVC resin and aluminum are major components in the production of our products and changes in PVC resin and aluminum prices have a direct impact on our cost of products sold. Historically, we have been able to pass on a substantial portion of significant price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.

Recent developments

On April 9, 2013, we acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada, for consideration of approximately CAD $21.0 million. We used borrowings under the ABL Facility to pay the aggregate purchase price. For the year ended December 31, 2012, Gienow had total net sales of approximately CAD $102.1 million and a net loss of approximately CAD $2.5 million.

On May 6, 2013, we entered into a share purchase agreement to acquire all of the issued and outstanding capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada, for consideration of approximately CAD $82.0 million, subject to certain purchase price adjustments. We intend to use a portion of the net proceeds from this offering to pay the aggregate purchase price. For the year ended December 31, 2012, Mitten had net sales of approximately CAD $133.7 million and a net loss of approximately CAD $0.3 million. The acquisition is subject to a number of customary closing conditions, including the receipt of regulatory approvals, and there can be no assurance that the acquisition will be consummated.

The financial information included in this prospectus for Gienow and Mitten has been prepared in accordance with Canadian GAAS. Canadian GAAS differs in some material respects from U.S. GAAP, and so the financial information relating to Gienow and Mitten may not be comparable to the financial statements and financial information of U.S. companies, including the Company.

Our historical results of operations and financial statements included in this prospectus do not reflect the results of operations for Gienow or Mitten.

Impact of weather

Since our building products are intended for exterior use, our sales and operating earnings tend to be lower during periods of inclement weather. Weather conditions in the first and fourth quarters of each calendar year historically result in these quarters producing significantly less

 

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sales revenue than in any other period of the year. As a result, we have historically had lower profits or higher losses in the first quarter of each calendar year and reduced profits in the fourth quarter of each calendar year due to the weather. Our results of operations for individual quarters in the future may be impacted by adverse weather conditions. In addition, favorable or unfavorable weather conditions may influence the comparability of our results from year to year or from quarter to quarter.

Critical accounting policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Certain of our accounting policies require the application of judgments in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate. If different conditions result compared to our assumptions and judgments, the results could be materially different from our estimates. Management also believes that the nine areas where different assumptions could result in materially different reported results are (1) goodwill and intangible asset impairment tests, (2) accounts receivable related to estimation of allowances for doubtful accounts, (3) inventories in estimating reserves for obsolete and excess inventory, (4) warranty reserves, (5) insurance reserves, (6) income taxes, (7) rebates, (8) pensions and (9) environmental accruals and other contingencies. Although we believe the likelihood of a material difference in these areas is low based upon our historical experience, a 10% change in our allowance for doubtful accounts, inventory reserve estimates, and warranty reserve at December 31, 2012 would result in an approximate $0.4 million, $0.7 million, and $3.8 million impact on expenses, respectively. Additionally, we have included in the discussion that follows our estimation methodology for both accounts receivable and inventories. While all significant policies are important to our consolidated financial statements, some of these policies may be viewed as being critical. Our critical accounting policies include:

Revenue Recognition.  We recognize sales based upon shipment of products to our customers net of applicable provisions for discounts and allowances. Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product. For certain products, it is industry standard that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Revenue includes the selling price of the product and all shipping costs paid by the customer. Revenue is reduced at the time of sale for estimated sales returns and all applicable allowances and discounts based on historical experience. We also provide for estimates of warranty, bad debts, shipping costs and certain sales-related customer programs at the time of sale. Shipping and warranty costs are included in cost of products sold. Bad debt expense and sales-related marketing programs are included in SG&A expense. We believe that our procedures for estimating such amounts are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are reconciled to the actual amounts.

Accounts Receivable.  We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which is provided for in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers’ receivables, considering customers’

 

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financial condition, credit history and other current economic conditions. If a customer’s financial condition was to deteriorate, which might impact its ability to make payment, then additional allowances may be required.

Inventories.  Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market. We record provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold.

Goodwill Impairment.  We perform an annual test for goodwill impairment during the fourth quarter of each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. We use the two-step method to determine goodwill impairment. If the carrying amount of a reporting unit exceeds its fair value (“Step One”), we measure the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

To evaluate goodwill impairment, we estimate the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies. A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment.

 

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A summary of the key assumptions utilized in the goodwill impairment analysis at November 24, 2012, November 26, 2011, and November 27, 2010, as it relates to the Step One fair values and the sensitivities for these assumptions follows:

 

      Windows and Doors  
    

As of

November 24,

2012

    

As of

November 26,

2011

    

As of

November 27,

2010

 

 

 

Assumptions:

        

Income approach:

        

Estimated housing starts in terminal year

     1,050,000         1,050,000         1,150,000   

Terminal growth rate

     3.5%         3.5%         3.5%   

Discount rates

     18.0%         20.0%         19.0%   

Market approach:

        

Control premiums

     20.0%         20.0%         20.0%   

Sensitivities:

        

(amounts in thousands)

        

Estimated fair value decrease in the event of a 1% decrease in the terminal year growth

   $ 8,000       $ 7,768       $ 10,679   

Estimated fair value decrease in the event of a 1% increase in the discount rate

     22,000         16,170         16,859   

Estimated fair value decrease in the event of a 1% decrease in the control premium

     3,000         2,143         2,330   

 

 

 

      Siding, Fencing and Stone  
    

As of

November 24,

2012

    

As of

November 26,

2011

    

As of

November 27,

2010

 

 

 

Assumptions:

        

Income approach:

        

Estimated housing starts in terminal year

     1,050,000         1,050,000         1,150,000   

Terminal growth rate

     3.0%         3.0%         3.0%   

Discount rates

     13.0%         17.0%         16.0%   

Market approach:

        

Control premiums

     10.0%         10.0%         10.0%   

Sensitivities:

        

(amounts in thousands)

        

Estimated fair value decrease in the event of a 1% decrease in the terminal year growth

   $ 62,000       $ 32,974       $ 47,251   

Estimated fair value decrease in the event of a 1% increase in the discount rate

     135,000         64,112         71,220   

Estimated fair value decrease in the event of a 1% decrease in the control premium

     14,000         8,930         8,865   

 

 

 

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(amounts in thousands)  

As of

November 24,

2012

   

As of

November 26,

2011

   

As of

November 27,

2010

 

 

 

Estimated Windows and Doors reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method

  $      $ 4,000      $ 5,600   

Estimated Siding, Fencing and Stone reporting unit fair value increase in the event of a 10% increase in the weighting of the market multiples method

    30,000        10,300        2,700   

 

 

We provide no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase or (3) the earnings, book values or projected earnings and cash flows of our reporting units will not decline. We will continue to analyze changes to these assumptions in future periods. We will continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in future goodwill impairments.

Income Taxes.  We utilize the asset and liability method in accounting for income taxes, which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financial statements and the amounts included in our federal and state income tax returns be recognized in the consolidated balance sheet. The amount recorded in our consolidated financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states in which we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. We establish reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. We have executed a tax sharing agreement with Ply Gem Holdings and Ply Gem Investment Holdings (during 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation) pursuant to which tax liabilities for each respective party are computed on a stand-alone basis. Our U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns. Ply Gem Canada, Inc. (“Ply Gem Canada”) files separate Canadian income tax returns.

At December 31, 2011, we were in a full federal valuation allowance position as we were no longer in a net deferred liability tax position and continued to incur losses for income tax purposes. Additionally, at December 31, 2011, we were in a partial state valuation allowance position for certain legal entities primarily related to losses for income tax purposes. At December 31, 2012, we remained in a full federal valuation allowance position and a partial state valuation allowance position as we continued to incur cumulative losses for income tax purposes. As of December 31, 2012 and 2011, we did not have a valuation allowance for our profitable foreign operations. However, Gienow will reflect a full valuation allowance upon acquisition. Refer to Note 10 to our audited consolidated financial statements included elsewhere in this prospectus for additional information regarding income taxes.

 

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Results of operations

The following table summarizes net sales and net income (loss) by segment and is derived from the accompanying consolidated statements of operations included in this report:

 

(amounts in thousands)   Three months ended     Year ended December 31,  
     March 30, 2013     March 31, 2012     2012     2011     2010  
    (unaudited)     (unaudited)                    

Net Sales

         

Siding, Fencing and Stone

  $  137,725      $  142,787      $ 658,045      $ 639,290      $ 604,406   

Windows and Doors

    119,372        96,389        463,256        395,567        391,500   

Operating earnings (loss)

         

Siding, Fencing and Stone

    17,114        15,949        110,456        90,849        92,612   

Windows and Doors

    (12,096     (10,396     (20,565     (31,134     (19,410

Unallocated

    (5,590     (4,350     (19,871     (14,784     (16,372

Foreign currency (loss) gain

         

Windows and Doors

    (33     68        409        492        510   

Interest income (expense), net

         

Siding, Fencing and Stone

    (8     10        47        83        121   

Windows and Doors

    11        3        18        13        (90

Unallocated

    (23,656     (25,054     (103,107     (101,480     (122,864

Provision for income taxes

         

Unallocated

    (3,849     (1,872     (2,835     (683     (5,027

Gain (loss) on modification or extinguishment of debt

         

Unallocated

                  (3,607     (27,863     98,187   

Net income (loss)

  $ (28,107   $ (25,642   $ (39,055   $ (84,507   $ 27,667   

 

 

The following tables set forth our results of operations based on the amounts and the percentage relationship of the items listed to net sales for the periods indicated. However, our results of operations set forth in the tables below may not necessarily be representative of our future operating results.

This review of performance is organized by business segment, reflecting the way we manage our business. Each business group leader is responsible for operating results down to operating earnings (loss). We use operating earnings as a performance measure as it captures the income and expenses within the management control of our business leaders. Corporate management is responsible for making all financing decisions. Therefore, each segment discussion focuses on the factors affecting operating earnings, while interest expense and income taxes and certain other unallocated expenses are separately discussed at the corporate level.

Siding, Fencing and Stone segment

 

     Three months ended     Year ended December 31,  
(amounts in thousands)   March 30, 2013     March 31, 2012     2012     2011     2010  

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (unaudited)     (unaudited)                                      

Statement of operations data:

                   

Net sales

  $  137,725        100.0%      $  142,787        100.0%      $ 658,045        100.0%      $ 639,290        100.0%      $ 604,406        100.0%   

Gross profit

    33,945        24.6%        32,726        22.9%        180,244        27.4%        158,798        24.8%        155,535        25.7%   

SG&A expenses

    14,682        10.7%        14,705        10.3%        61,201        9.3%        59,646        9.3%        54,410        9.0%   

Amortization of intangible assets

    2,149        1.6%        2,072        1.5%        8,587        1.3%        8,303        1.3%        8,513        1.4%   

Operating earnings

    17,114        12.4%        15,949        11.2%        110,456        16.8%        90,849        14.2%        92,612        15.3%   

 

 

 

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Net sales

Net sales for the three months ended March 30, 2013 decreased $5.1 million or 3.5% compared to the same period in 2012. We believe the net sales decrease is primarily a result of the adverse weather conditions experienced in the three months ended March 30, 2013 relative to the three months ended March 31, 2012. According to the U.S. National Climatic Data Center, the 2012 winter was the fourth warmest winter for the United States in the last century while the 2013 winter was more severe. The total winter precipitation averaged across the contiguous United States for the first quarter of 2013 was approximately 7.10 inches, which was above the 20th century average. These deteriorating weather conditions produced unfavorable sales conditions for both the new construction market and the repair and remodeling market for the three months ended March 30, 2013 culminating in a net sales decrease of 3.5%. Despite these weather conditions, 2013 single family housing starts, according to the U.S. Census Bureau, were estimated to increase 28.2% in the first quarter of 2013 as compared to the first quarter of 2012. In addition to the previously discussed negative weather impact, we believe the availability of labor to support the increased single family housing starts has increased the lag period, which is the estimated time from the start of the home construction process to when our products are placed onto the home, from approximately 90 days to 120 days, delaying sales of our products for the new construction market by approximately 30 days.

In addition to these new construction industry trends, the repair and remodel market remains soft as the Leading Indicator of Remodeling Activity (“LIRA”) showed no significant remodeling increases in the first quarter of 2013. We believe that big ticket remodeling expenditures have been delayed as a result of weak consumer confidence, poor weather conditions, and lack of availability of home improvement financing alternatives. Combining the strength of demand in the new construction market with the softer market conditions for repair and remodeling products, the Vinyl Siding Institute reported that vinyl siding industry unit shipments decreased 5.4%, while our own vinyl siding unit shipments increased 2.2% for the three months ended March 30, 2013 compared to the three months ended March 31, 2012.

Net sales for the year ended December 31, 2012 increased $18.8 million or 2.9% compared to the year ended December 31, 2011. During the year ended December 31, 2011, our net sales were reduced by a $10.4 million sales credit related to an inventory buyback for the lift-out of competitors’ inventory related to a significant new customer win. However, the $10.4 million inventory buyback was offset by the initial stocking sales and inventory build to this same new customer. Overall, our 2.9% net sales increase was driven by higher unit volumes which resulted from improved conditions in the U.S. new construction housing market including, but not limited to, the declining number of foreclosures, rising home prices, and improving general economic conditions for the year ended December 31, 2012. According to the NAHB, 2012 single family housing starts are estimated to have increased approximately 23.2% relative to 2011. Historically, we have believed there is a 90 day lag between a new housing start with ground being broken and the time when our products are utilized on the exterior of a home. During 2012, we believe that this lag period may have expanded as a result of labor shortages in the homebuilding industry.

While new construction experienced significant growth, market demand for repair and remodeling products continued to lag the new construction sector in 2012. According to the LIRA index, the four-quarter moving growth rate at December 31, 2012 was 8.8% compared to 2.2% at December 31, 2011. Combining the strength of demand in the new construction market with the softer market conditions for repair and remodeling products, the Vinyl Siding Institute reported that vinyl siding industry shipments increased 3.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011. After giving effect to the aforementioned

 

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initial stocking sales and inventory build, the Company believes that its vinyl siding unit volume shipments would have increased 5.3%. The Company’s vinyl siding market position remained consistent in 2012 at approximately 36.0% compared to 2011. During the 2012 fourth quarter, the Company’s vinyl siding industry shipments increased 5.7% compared to the same period in 2011, while industry shipments increased 2.7%.

Net sales for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $34.9 million, or 5.8%. Net sales increased despite continued low industry unit volume that resulted from the challenging market conditions that persisted in the U.S. housing market. These negative general market conditions were offset by sales to new customers and higher selling prices that were increased in response to higher raw material and freight costs. According to the NAHB, 2011 single family housing starts decreased approximately 7.9% from 2010. This decrease was attributable in part to the poor general economic conditions that existed in the United States including, among other things, high unemployment, the number of foreclosures and falling home prices that negatively impacted demand for the U.S. housing market.

The Company’s sales to new customers and higher selling prices related to increased material costs offset the general housing market conditions. In addition, favorable weather conditions during the fourth quarter of 2011 also contributed to the sales growth year over year. During the 2011 fourth quarter, the Company’s vinyl siding unit shipments increased 10.8% compared to the same period in 2010. According to the Vinyl Siding Institute, the vinyl siding industry shipments decreased 3.9% for 2011 compared to 2010 while the Company’s shipments increased approximately 7.1% driven by sales to new customers. The Company’s vinyl siding market position for 2011 increased to approximately 36.0% from 32.3% for 2010. Included as a reduction of net sales for the year ended December 31, 2011 were inventory buybacks for the lift-out of competitors’ inventory of approximately $11.2 million related to these new customers. Excluding the impact of these buybacks, 2011 net sales would have increased 7.6% compared to 2010.

Gross profit

Gross profit for the three months ended March 30, 2013 increased compared to the three months ended March 31, 2012 by approximately $1.2 million or 3.7%. The gross profit increase was attributable to lower aluminum material costs offset by the 3.5% volume decrease and increasing PVC material costs for the three months ended March 30, 2013 relative to March 31, 2012. According to the London Metal Exchange, the price of aluminum decreased approximately 4.4% for the three months ended March 30, 2013 relative to the three months ended March 31, 2012. Published market prices for PVC resin for the three months ended March 30, 2013 increased 3.3% relative to the three months ended March 31, 2012. In addition to commodity cost fluctuations, we also incurred approximately $0.3 million of negative gross profit associated with manufacturing start-up costs for our new cellular PVC trim board product, which we began selling during the three months ended March 30, 2013.

Gross profit as a percentage of sales increased from 22.9% for the three months ended March 31, 2012 to 24.6% for the three months ended March 30, 2013. The 170 basis point increase is attributed to the relationship and timing between our pricing and the commodity cost fluctuations for aluminum and PVC resin.

Gross profit for the year ended December 31, 2012 increased $21.4 million, or 13.5%, compared to the year ended December 31, 2011. Gross profit as a percentage of sales increased from 24.8% for the year ended December 31, 2011 to 27.4% for the year ended December 31, 2012. Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the

 

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buyback, or lift-out, of our competitor’s product on initial stocking orders, partially offset by the scrap value of inventory received. Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks. The remaining increase from 25.9% to 27.4% was primarily attributable to increases in unit volume shipments specifically related to new construction and the 23.2% volume increase from 2011.

As it relates to our two primary raw material cost components, aluminum and PVC resin, there has been movement relative to prior years. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

Gross profit for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $3.3 million, or 2.1%. Gross profit as a percentage of sales decreased from 25.7% for the year ended December 31, 2010 to 24.8% for the year ended December 31, 2011. Included in 2011 gross profit was a net inventory buyback of approximately $9.9 million resulting from the buyback, or lift-out, of our competitor’s product on initial stocking orders, partially offset by the scrap value of inventory received. Our gross profit as a percentage of sales for the year ended December 31, 2011 would have been 25.9% excluding these buybacks, which is consistent with the prior year. According to the London Metal Exchange, the price of aluminum increased approximately 13.9% for the year ended December 31, 2011 compared to the year ended December 31, 2010. In addition, the average market price for PVC resin was estimated to have increased 14.1% for 2011 compared to 2010. As discussed above, the Company initiated selling price increases in response to these rising material and freight costs.

SG&A expense

SG&A expense for the three months ended March 30, 2013 decreased from the three months ended March 31, 2012 by approximately $23,000, or 0.2%. As a percentage of net sales, SG&A expense increased from 10.3% to 10.7% for the three months ended March 30, 2013 relative to the three months ended March 31, 2012 based on the net sales decrease of 3.5% experienced during the first quarter of 2013.

SG&A expense for the year ended December 31, 2012 increased $1.6 million, or 2.6%, relative to the year ended December 31, 2011. As a percentage of sales, SG&A expenses were consistent between 2012 and 2011 at approximately 9.3%. The SG&A expense dollar increase resulted primarily from higher management incentive compensation expense related to improved business performance.

SG&A expense for the year ended December 31, 2011 increased from the year ended December 31, 2010 by approximately $5.2 million, or 9.6%. The increase in SG&A expense was attributed to higher employee related expenses of approximately $2.7 million as well as increased selling and marketing expenses of approximately $2.2 million related to increased sales. As a percentage of sales, SG&A expense increased slightly to 9.3% for the year ended December 31, 2011 from 9.0% for the year ended December 31, 2010 due to higher employee related expenses.

Amortization of intangible assets

Amortization expense for the three months ended March 30, 2013 was consistent with the same period in 2012. Amortization expense as a percentage of net sales was also consistent at approximately 1.6% for the three months ended March 30, 2013 compared to 1.5% for the three months ended March 31, 2012.

 

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Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and December 31, 2010.

Windows and Doors segment

 

      Three months ended     Year ended December 31,  
(amounts in thousands)    March 30,
2013
    March 31,
2012
          2012           2011           2010  

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     (unaudited)     (unaudited)                                      

Statement of operations data:

                    

Net sales

   $ 119,372        100.0   $ 96,389        100.0   $ 463,256        100.0   $ 395,567        100.0   $ 391,500        100.0

Gross profit

     7,901        6.6     10,189        10.6     63,955        13.8     51,734        13.1     60,425        15.4

SG&A expense

     17,944        15.0     15,998        16.6     66,170        14.3     64,518        16.3     61,285        15.7

Amortization of intangible assets

     2,053        1.7     4,587        4.8     18,350        4.0     18,350        4.6     18,550        4.7

Operating loss

     (12,096     (10.1 )%      (10,396     (10.8 )%      (20,565     (4.4 )%      (31,134     (7.9 )%      (19,410     (5.0 )% 

Currency transaction (loss) gain

     (33         68        0.1     409        0.1     492        0.1     510        0.1

 

   

 

 

   

 

 

 

Net sales

Net sales for the three months ended March 30, 2013 increased $23.0 million or 23.8% from the three months ended March 31, 2012. The net sales increase was driven by sales gains with new and existing customers and the improving conditions in the U.S. residential new construction market. According to the U.S. Census Bureau, 2013 single family housing starts were estimated to have increased approximately 28.2% for the first quarter of 2013 as compared to the first quarter of 2012. Our Windows and Doors segment is highly aligned with the new construction market as opposed to the repair and remodeling market and the significant growth in single family starts translated into significant net sales growth for our US Windows business during the three months ended March 30, 2013. Alternatively, our net sales in Canada were consistent for the three months ended March 30, 2013 as compared to the three months ended March 31, 2012. According to the Canadian Mortgage and Housing Corporation, single family housing starts in Alberta, Canada were estimated to have increased 4.8% in the three months ended March 30, 2013 compared to the three months ended March 31, 2012.

Net sales for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $67.7 million, or 17.1%. The net sales increase is primarily attributable to the aforementioned 23.2% increase in single family housing starts for the year ended December 31, 2012 as compared to the year ended December 31, 2011. Since the majority of our current Windows and Doors business is related to new construction demand versus repair and remodeling, current market conditions for new construction have driven the net sales increase as well as certain strategic market share gains. In addition, the net sales increase resulted from improving end market conditions in Western Canada. According to the Canadian Mortgage and Housing Corporation, estimates that single family housing starts in Alberta, Canada have increased approximately 15.1% for the year ended December 31, 2012.

Net sales for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $4.1 million, or 1.0%. Despite the aforementioned 7.9% decrease in U.S. single family housing starts for the year ended December 31, 2011 compared to the year ended December 31, 2010, the Windows and Doors segment demonstrated an ability to

 

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offset this general market decrease by gaining sales with new customers in both the new construction and repair and remodeling markets specifically expanding our multi-family opportunities. The sales gains to new customers were partially offset by a declining end user market in Western Canada resulting from decreased housing starts in Alberta, Canada which the Company believes were impacted in part by unusually poor weather conditions in the first half of 2011. According to the Canadian Mortgage and Housing Corporation, housing starts in Alberta, Canada were estimated to have decreased by 2.1% in 2011 as compared to 2010.

Gross profit

Gross profit for the three months ended March 30, 2013 decreased $2.3 million or 22.5% compared to the three months ended March 31, 2012. The decrease in gross profit, despite the $23.0 million increase in net sales for the three months ended March 30, 2013, can be attributed to labor inefficiencies and other ramp up costs associated with the 23.8% increase in sales volume with significant net sales growth in certain regional areas for value-priced products. We have experienced significant demand increases for our value-priced products in the new construction market but this demand has not been consistent for our higher priced products or our repair and remodeling products. The demand increase has been focused on our lower margin products contributing to the gross profit decrease in the first quarter of 2013. In addition, we incurred approximately $1.1 million of higher than normal expense associated with our “enterprise lean” initiative that will streamline our window product offering providing greater manufacturing flexibility in the future. We also incurred approximately $0.8 million of expense associated with the consolidation and start-up of our production facility in Dallas, Texas.

The significant volume growth has required additional labor, manufacturing lines, and shifts to fulfill customer orders in certain markets which requires us to hire and train production employees approximately 90 days in advance of sales, which results in a near-term negative impact on gross profit. Our ability to maximize future gross profit percentages will depend to a great extent on our ability to employ, train, and retain qualified manufacturing personnel with the ability to design, manufacture, and assemble these window products. Given the expected demand growth for the U.S. single family housing, our ability to react to this ever-changing environment will have a direct impact on our future performance. Recognizing this challenge, we initiated the “enterprise lean” initiative that is intended to provide greater manufacturing flexibility in the future.

As a percentage of net sales, gross profit percentage decreased from 10.6% for the three months ended March 31, 2012 to 6.6% for the three months ended March 30, 2013. This 400 basis point decrease is attributed primarily to the increased demand for our value-priced products and from labor inefficiencies associated with the volume growth experienced during the first quarter of 2013.

Gross profit for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 by approximately $12.2 million or 23.6%. Gross profit as a percentage of sales increased from 13.1% for the year ended December 31, 2011 to 13.8% for the year ended December 31, 2012. The increase in gross profit and gross profit percentage can be attributed to the net sales increase of 17.1% and the corresponding improved operating leverage, specifically in the domestic United States, on fixed costs resulting from the net sales increase during the year ended December 31, 2012. The favorable volume impact on gross profit was partially offset by unfavorable labor inefficiencies due to production ramp-up costs related to the 2012 market position gains.

 

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Gross profit for the year ended December 31, 2011 decreased compared to the year ended December 31, 2010 by approximately $8.7 million, or 14.4%. Gross profit as a percentage of sales decreased from 15.4% in 2010 to 13.1% in 2011. The decrease in gross profit and gross profit percentage was caused by higher raw material costs, specifically PVC resin and aluminum, and freight costs that were not fully offset by selling price increases. In addition, the Company experienced short-term inefficiencies related to increased production volumes associated with the sales to new customers as discussed above, which also increased our sales mix of our value priced window products that generally carry lower gross profit margins, partially offset by favorable warranty experience for the year ended December 31, 2011.

SG&A expense

SG&A expense for the three months ended March 30, 2013 increased compared to the three months ended March 31, 2012 by approximately $1.9 million or 12.2%. The increase in SG&A expense for the three months ended March 30, 2013 was primarily driven by higher sales and marketing expenses related to the 23.8% increase in sales. As a percentage of net sales, SG&A expense decreased from 16.6% of net sales for the three months ended March 31, 2012 to 15.0% for the three months ended March 30, 2013 as we gained leverage on the fixed component of our SG&A expense in relation to the net sales volume growth experienced in the three months ended March 30, 2013.

SG&A expenses for the year ended December 31, 2012 increased $1.7 million or 2.6% relative to the year ended December 31, 2011. The 2011 SG&A expense included a $1.6 million expense related to an incremental environmental liability that was nonrecurring in 2012 adjusting the actual increase relative to 2012 to approximately $3.3 million. This increase was primarily driven by higher employee related costs specifically higher management incentive compensation expense of $1.6 million based on improved operating performance. In addition, we also incurred increased selling and marketing expenses of approximately $1.7 million related primarily to increased sales in the year ended December 31, 2012 compared to the year ended December 31, 2011. As a percentage of net sales, SG&A expenses decreased to 14.3% for the year ended December 31, 2012 from 16.3% for the year ended December 31, 2011 as we supported the higher net sales with better leverage on our SG&A expenses.

SG&A expense for the year ended December 31, 2011 increased compared to the year ended December 31, 2010 by approximately $3.2 million, or 5.3%. The increase can be predominantly attributed to higher selling and marketing expenses of approximately $1.1 million as well as higher legal and professional fees of approximately $0.4 million. In addition, we recognized an incremental environmental liability of approximately $1.6 million within SG&A expenses during the fourth quarter of 2011 related to a preliminary cost estimate provided to the EPA, as discussed in the “Business—Environmental” section of this prospectus. Excluding the $1.6 million, SG&A expense as a percentage of net sales would have been 15.9% for the year ended December 31, 2011 consistent with the 15.7% for the year ended December 31, 2010.

Amortization of intangible assets

Amortization expense for the three months ended March 30, 2013 decreased compared to the three months ended March 31, 2012 by approximately $2.5 million or 55.2%. During 2010, we decreased the life of certain trademarks to three years as a result of future marketing plans regarding the use of the trademarks. These trademarks were fully amortized at the end of 2012 causing the decrease in amortization expense for the three months ended March 30, 2013 relative to the three months ended March 31, 2012.

 

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As a percentage of net sales, amortization of intangible assets decreased from 4.8% to 1.7% as a result of the full amortization of these trademarks and the 23.8% increase in net sales for the three months ended March 30, 2013.

Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.

Currency transaction gain (loss)

Currency transaction gain (loss) was consistent for the three months ended March 30, 2013 and March 31, 2012. Currency transaction gain was consistent for the years ended December 31, 2012, 2011 and 2010.

Unallocated operating earnings, interest and provision for income taxes

 

     Three months ended     Year ended December 31,  
(amounts in thousands)   March 30,
2013
    March 31,
2012
    2012     2011     2010  

 

 
    (unaudited)     (unaudited)                    

Statement of operations data:

         

SG&A expenses

  $ (5,590   $ (4,290   $ (19,871   $ (14,748   $ (14,765

Amortization of intangible assets

           (60            (36     (36

Write-off of previously capitalized offering costs

                                (1,571
 

 

 

 

Operating loss

    (5,590     (4,350     (19,871     (14,784     (16,372

Interest expense

    (23,657     (25,055     (103,112     (101,486     (122,881

Interest income

    1        1        5        6        17   

Gain (loss) on modification or extinguishment of debt

                  (3,607     (27,863     98,187   

Provision for income taxes

    (3,849     (1,872     (2,835     (683     (5,027

 

 

SG&A expense

Unallocated losses include items which are not directly attributed to or allocated to either of our reporting segments. Such items include legal costs, corporate payroll, and unallocated finance and accounting expenses. The unallocated operating loss for the three months ended March 30, 2013 increased by $1.3 million or 30.3% compared to the same period in 2012 due primarily to increases in various personnel costs and certain acquisition costs associated with the Gienow purchase.

SG&A expenses for the year ended December 31, 2012 increased by $5.1 million compared with the year ended December 31, 2011. This SG&A expenses increase in 2012 is primarily due to the timing of certain employee related costs, including stock compensation ($1.3 million), long-term incentive plan expenses ($0.9 million), insurance expenses ($0.3 million) and management incentive compensation expenses ($2.1 million). SG&A expenses for the year ended December 31, 2011 were consistent with the year ended December 31, 2010.

Amortization of intangible assets

Amortization expense for the three months ended March 30, 2013 was consistent with the three months ended March 31, 2012. Amortization expense for the year ended December 31, 2012 was consistent with the years ended December 31, 2011 and 2010.

 

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Write-off of previously capitalized offering costs

We incurred approximately $1.6 million of costs associated with a proposed public equity offering during 2010. Since the offering was postponed for a period greater than 90 days, the costs, which were initially capitalized, were written off during the fourth quarter of 2010.

Interest expense

Interest expense for the three months ended March 30, 2013 decreased by approximately $1.4 million or 5.6% compared to the same period in 2012. The decrease was due to the reduction in interest expense from having the 13.125% Senior Subordinated Notes outstanding during the three months ended March 31, 2012 compared to having the 9.375% Senior Notes outstanding during the three months ended March 30, 2013, partially offset by the interest expense associated with having the $40.0 million of Senior Tack-on Notes outstanding for the entire three months ended March 30, 2013 versus a partial period of the three months ended March 31, 2012.

Interest expense for the year ended December 31, 2012 increased by approximately $1.6 million compared to the same period in 2011. The net increase was primarily due to the $40 million of the Senior Tack-on Notes.

Interest expense for the year ended December 31, 2011 decreased by approximately $21.4 million, or 17.4%, over the same period in 2010. The decrease was primarily due to the deleveraging event that occurred in February 2010 and the debt refinancings that were completed during 2011. Specifically, the net decrease was due to the following:

 

 

a decrease of approximately $3.9 million of interest on the 9.0% Senior Subordinated Notes, which were redeemed on February 16, 2010;

 

 

a decrease of approximately $75.9 million of interest on the 11.75% Senior Secured Notes, which were purchased and redeemed in February and March 2011;

 

 

an increase of approximately $58.7 million of interest paid on the 8.25% Senior Secured Notes, which were issued in February 2011;

 

 

a decrease of approximately $1.1 million of interest on our ABL Facility borrowings, primarily due to a decrease in the interest rate;

 

 

an increase of approximately $2.5 million due to the amortization of the discount and tender premium on the 8.25% Senior Secured Notes, which were issued in February 2011; and

 

 

a decrease of approximately $1.7 million due to the write-off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes purchased and redeemed in February and March 2011, partially offset by additional amortization related to the financing costs for the new 8.25% Senior Secured Notes.

Interest income

Interest income for the three months ended March 30, 2013 was consistent with the three months ended March 31, 2012. Interest income for the year ended December 31, 2012 was consistent with the year ended December 31, 2011. Interest income for the year ended December 31, 2011 decreased by $11,000 due to lower interest rates in 2011 as compared to 2010.

 

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Gain (loss) on modification or extinguishment of debt

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes in September 2012, as further described in the “Liquidity and capital resources” section below, we recognized a loss on modification/extinguishment of debt of approximately $3.6 million for the year ended December 31, 2012. The loss consisted of an early call premium of approximately $9.8 million, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes, and approximately $1.5 million was expensed as a loss on extinguishment of debt in the consolidated statement of operations. We also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes in this transaction. We also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations. The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the debt refinancings during January and February 2011, as further described in the “Liquidity and capital resources” section below, we recognized a loss on modification or extinguishment of debt of approximately $27.9 million for the year ended December 31, 2011. The loss consisted of the write-off of a portion of the tender premium paid with the redemption of the 11.75% Senior Secured Notes of approximately $10.9 million, the write-off of a portion of the capitalized bond discount related to the 11.75% Senior Secured Notes of approximately $0.8 million, the write-off of a portion of the capitalized financing costs related to the 11.75% Senior Secured Notes of approximately $2.8 million, the write-off of the capitalized financing costs related to the previous ABL Facility of approximately $1.2 million and the expense of certain third-party financing costs related to the 8.25% Senior Secured Notes of approximately $12.3 million. The loss was recorded separately in the consolidated statement of operations for the year ended December 31, 2011.

For the year ended December 31, 2010, we reported a gain on extinguishment of debt of approximately $98.2 million. As a result of the $141.2 million redemption of the 9% Senior Subordinated Notes on February 16, 2010, we recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write off of unamortized debt issuance costs. As a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by an affiliate of our controlling stockholder in exchange for equity of Ply Gem Prime valued at approximately $114.9 million on February 12, 2010, we recognized a gain on extinguishment of debt of approximately $100.4 million including the write-off of unamortized debt issuance costs of approximately $3.5 million. The net $98.2 million gain on debt extinguishment was recorded within other income (expense) separately in the consolidated statement of operations for the year ended December 31, 2010.

Income taxes

The income tax provision for the three months ended March 30, 2013 decreased by approximately $2.0 million compared to the same period in 2012. Our pre-tax loss for the three months ended March 30, 2013 was approximately $24.3 million compared to a pre-tax loss of $23.8 million for the three months ended March 31, 2012. For the three months ended March 30, 2013, our estimated effective income tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and

 

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foreign income tax expense. Our tax provision for the three months ended March 30, 2013 was primarily due to the combination of income and losses from our operating units and pre-tax losses in some entities for which no tax benefit was recognized.

Income tax expense for the year ended December 31, 2012 increased to approximately $2.8 million tax expense from approximately $0.7 million tax expense for the year ended December 31, 2011. The income tax expense of approximately $2.8 million was comprised of approximately $0.8 million of federal tax expense, approximately $2.3 million of state tax expense, and approximately $0.3 million of foreign income tax benefit. The increase in tax expense is primarily due to the impact of the full federal valuation allowance and a partial state valuation allowance in addition to state income tax expense as operating performance has improved offset by the foreign income benefit caused primarily by a reversal of certain tax uncertainties.

As of December 31, 2012, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. The Company’s effective tax rate for the year ended December 31, 2012 was approximately 7.8%. For the year ended December 31, 2012, our estimated effective tax rate varied from the statutory rate primarily due to state income tax expense, changes in the valuation allowance, changes in tax contingencies and foreign income tax benefit.

Income tax expense for the year ended December 31, 2011 decreased to approximately $0.7 million tax expense from approximately $5.0 million tax expense for the year ended December 31, 2010. The income tax expense of approximately $0.7 million was comprised of approximately $0.2 million of state tax benefit and approximately $0.9 million of foreign income tax expense. The decrease in tax expense is primarily due to the increase in the taxable loss for the year ended December 31, 2011. As of December 31, 2011, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses accumulated by the Company, management did not rely upon the projections of future taxable income in assessing the recoverability of deferred tax assets. The Company’s effective tax rate for the year ended December 31, 2011 was approximately 0.8%.

Liquidity and capital resources

During the three months ended March 30, 2013, cash decreased by approximately $16.0 million compared to an increase of approximately $8.5 million during the three months ended March 31, 2012. The decrease in cash generated was primarily due to increased spending on inventory and reductions in other general working capital metrics.

During the year ended December 31, 2012, cash and cash equivalents increased to approximately $27.2 million compared to approximately $11.7 million as of December 31, 2011. During the year ended December 31, 2011, cash and cash equivalents decreased from approximately $17.5 million to $11.7 million as of December 31, 2011.

Our business is seasonal because inclement weather during the winter months reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors, especially in the Northeast and Midwest regions of the United States and Canada. As a result, our liquidity typically increases during the second and third quarters as our borrowing base increases under the ABL Facility reaching a peak early in the fourth quarter, and decreases late in the fourth quarter and throughout the first quarter.

 

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Our primary cash needs are for working capital, capital expenditures and debt service. As of March 30, 2013, our annual interest charges for debt service, including the ABL Facility, were estimated to be approximately $86.5 million. We do not have any scheduled debt maturities until 2016. On a pro forma basis, after giving effect to this offering and the application of net proceeds from this offering as described under “Use of proceeds,” our annual cash interest charges for debt service are estimated to be $73.1 million. The specific debt instruments and their corresponding terms and due dates are described in the following sections. Our capital expenditures have historically averaged approximately 1.5% of net sales on an annual basis. As of March 30, 2013, our purchase commitments for inventory were approximately $50.9 million. We finance these cash requirements through internally generated cash flow and funds borrowed under Ply Gem Industries’ ABL Facility.

We intend to use the net proceeds to us from this offering (i) to redeem, repurchase or repay a portion of our outstanding indebtedness, (ii) to pay transaction fees and other expense and (iii) for general corporate purposes, including to pay the aggregate purchase price for the acquisition of Mitten. See “Use of proceeds.” As of March 30, 2013, on an adjusted basis after giving effect to the Reorganization Transactions and this offering, we would have had approximately $855.0 million of indebtedness outstanding, including $44.0 million of outstanding borrowings and $97.1 million of borrowing base availability under our ABL Facility.

Our specific cash flow movement for the three months ended March 30, 2013 and March 31, 2012 and the years ended December 31, 2012, 2011 and 2010 is summarized below:

Cash provided by (used in) operating activities

Net cash used in operating activities for the three months ended March 30, 2013 was approximately $59.4 million as compared to approximately $36.5 million used in operations for the three months ended March 31, 2012. The increase in cash used in operating activities was primarily caused by a higher operating loss of $1.8 million reflecting the competitive landscape, ramp-up costs associated with volume growth, labor inefficiencies, and increased demand for our value-priced products. In addition to the higher operating loss, we experienced a reduction in working capital metrics primarily impacted by increased inventory levels to support the significant new construction demand growth not fully offset by payables movement.

Net cash provided by operating activities for the year ended December 31, 2012 was approximately $48.7 million. Net cash used in operating activities for the year ended December 31, 2011 was approximately $3.5 million, and net cash provided by operating activities for the year ended December 31, 2010 was approximately $6.7 million.

The increase in cash provided by operating activities was primarily caused by higher operating earnings of $25.1 million reflecting the recovering U.S. residential housing market which improved our operating leverage in the year ended December 31, 2012 as compared to the prior year. The higher operating earnings were supplemented by improved working capital metrics primarily achieved by monitoring inventory levels more effectively ($11.1 million), more favorable collection on receivables ($7.9 million) and management of accounts payable ($22.4 million) offset by negative movement in accrued expenses ($10.7 million) attributed to the refinancing of the 13.125% Senior Subordinated Notes with the 9.375% Senior Notes where accrued interest of approximately $5.7 million was paid during 2012.

The increase in cash used in operating activities during 2011 as compared to 2010 was due to an approximate $11.9 million decrease in operating earnings driven by commodity cost increases that were not fully offset with selling price increases and increased SG&A expense. In addition, the

 

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increase in cash used in operating activities was caused by a negative working capital change of approximately $14.6 million compared to 2010. This working capital change was driven by an increase in fourth quarter activity as the Company’s net sales increased 9.9% during the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010. This sales activity drove the corresponding receivable and inventory increases comparing December 31, 2011 to December 31, 2010. These increases were partially offset by a favorable change within accrued expenses which was primarily caused by an increase in accrued interest of approximately $20.6 million. This increase in accrued interest resulted from the debt refinancing activity in which $725.0 million of 11.75% Senior Secured Notes (June and December interest payments) were refinanced through the $800.0 million of 8.25% Senior Secured Notes (February and August interest payments). The change in the coupon rate saved the Company approximately $19.2 million in annual cash interest, while the new interest dates caused the 2011 favorable change within accrued interest.

Cash used in investing activities

Net cash used in investing activities for the three months ended March 30, 2013 and March 31, 2012 was approximately $6.7 million and $3.2 million, respectively, primarily used for capital expenditures on various ongoing capital projects. Capital expenditures for 2013 were higher, at approximately 2.6% of net sales, compared to our historical average of 1.5% due primarily to the Windows and Doors segment purchasing manufacturing equipment and tooling to address the significant volume growth in certain geographical areas. In addition, the Windows and Doors segment continues to incur additional capital expenditures for a product streamlining initiative aimed at optimizing our SKUs while improving certain functionalities across multiple window products.

Net cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was approximately $24.6 million, $11.4 million and $9.1 million, respectively. The cash used in investing activities for the years ended December 31, 2012, 2011, and 2010 was for capital expenditures. Capital expenditures for 2012 were higher at approximately 2.2% of net sales compared to our historical average of 1.5% due to the Company’s entrance into the cellular PVC trim market in our Siding, Fencing and Stone segment officially during 2013, which required equipment purchases in 2012. In addition, our Windows and Door segment incurred increased capital expenditures in 2012 related to tooling and equipment purchases for a product streamlining initiative aimed at optimizing our SKUs while improving certain functionalities across multiple window products. By streamlining product offerings, the Company will be able to capitalize on operating efficiencies in a recovering U.S. housing market allowing the Company to produce identical product at multiple facilities throughout the United States.

Cash provided by (used in) financing activities

Net cash provided by financing activities for the three months ended March 30, 2013 was approximately $49.9 million, primarily from net revolver borrowings of $50.0 million. Net cash provided by financing activities for the three months ended March 31, 2012 was approximately $48.1 million, primarily from net revolver borrowings of $15.0 million under the ABL Facility and net proceeds of $34.0 million from the Senior Tack-on Notes issued in February 2012.

Net cash used in financing activities for the year ended December 31, 2012 was approximately $8.8 million. The cash provided by financing activities was primarily from net proceeds of $34.0 million from the Senior Tack-on Notes issued in February 2012, $10.0 million in net proceeds from the issuance of the 9.375% Senior Notes in September 2012 used for the $9.8 million call premium partially offset by debt issuance costs of $3.0 million incurred for the Senior Tack-on

 

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Notes as well as the 9.375% Senior Notes. These financing activities were offset by $40.0 million in net revolver payments under the ABL Facility during 2012 reflective of improved operating performance for 2012.

Net cash provided by financing activities for the year ended December 31, 2011 was approximately $9.2 million, primarily from net revolver borrowings of $25.0 million under the ABL Facility, net proceeds of $75.0 million from the debt refinancing for the 8.25% Senior Secured Notes, offset by early tender premium payments of approximately $49.8 million, equity repurchases of $14.0 million, and debt issuance costs of approximately $27.0 million.

Net cash provided by financing activities for the year ended December 31, 2010 was approximately $2.4 million, and consisted of approximately $4.5 million net cash provided as a result of the $210.0 million deleveraging event that occurred during February 2010 of the 9.0% Senior Subordinated Notes, approximately $5.0 million cash provided from net ABL borrowings, approximately $5.0 million cash used for debt issuance costs, approximately $1.5 million cash used for a tax payment on behalf of our parent, and approximately $0.6 million net cash used in equity contributions/repurchases.

Our specific debt instruments and terms are described below:

2012 Developments

On September 27, 2012, Ply Gem Industries completed an offering for $160.0 million aggregate principal amount of 9.375% Senior Notes. The net proceeds of this offering, together with cash on hand, were deposited with the trustee for Ply Gem Industries’ 13.125% Senior Subordinated Notes to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017.

On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction. The net proceeds of approximately $32.7 million, after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will continue to be utilized for general corporate purposes. The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes due 2018.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par. Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses. A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes given that the 2011 transaction was predominately accounted for as a loan modification. The 8.25% Senior Secured Notes originally issued in February 2011 and the Senior Tack-on Notes issued in February 2012 will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum. Interest will be paid semi-annually on February 15 and August 15 of each year.

Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-

 

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whole” premium. Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the aggregate principal amount of the 8.25% Senior Secured Notes remains outstanding after the redemption. In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any. At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”). The indenture governing the 8.25% Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted indebtedness as defined in the indenture in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing the Company’s obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

In addition, the Company’s stock ownership in the Company’s subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities

 

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Act requiring separate financial statements of such subsidiary to be filed with the SEC. As of March 30, 2013, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.

On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes issued in February 2011 by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes. Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act. However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% Senior Secured Notes at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million. Interest was paid semi-annually on June 15 and December 15 of each year. On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its 11.75% Senior Secured Notes in a private placement transaction. The additional $25.0 million of 11.75% Senior Secured Notes had the same terms and covenants as the initial $700.0 million of 11.75% Senior Secured Notes.

On February 11, 2011, we purchased approximately $718.6 million principal amount of the 11.75% Senior Secured Notes in a tender offer at a price of $1,069.00 per $1,000 principal amount, which included an early tender payment of $40.00 per $1,000 principal amount, plus accrued and unpaid interest, and on February 28, 2011, we purchased $6.0 million principal amount of the 11.75% Senior Secured Notes in the tender offer at a price of $1,029.00 per $1,000 principal amount, plus accrued and unpaid interest. On March 13, 2011, pursuant to the terms of the indenture governing the 11.75% Senior Secured Notes, we redeemed the remaining approximate $0.4 million at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest. As a result of these transactions, we paid cumulative early tender premiums of approximately $49.8 million during the year ended December 31, 2011. Following the redemption on March 13, 2011, there were no longer any 11.75% Senior Secured Notes outstanding. The 11.75% Senior Secured Notes would have matured on June 15, 2013 and bore interest at the rate of 11.75% per annum. The loss recorded as a result of this purchase is discussed in detail in the section “Gain (loss) on debt modification or extinguishment” below.

Senior Secured Asset-Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility. Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013. The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In August 2011, the Company exercised a portion of the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the new ABL Facility from $175.0 million to $212.5 million. Under the terms of the new ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0

 

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million. Under the new ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada. All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans. The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high). Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility. As of March 30, 2013, the Company’s interest rate on the new ABL Facility was approximately 2.5%. The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company’s excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million. The new ABL Facility also contains a cash dominion requirement if the Company’s excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February and March). The fixed charge coverage ratio is calculated as the ratio of (i) the Company’s Adjusted EBITDA, as defined in the credit agreement governing the ABL Facility, less the aggregate amount of capital expenditures less taxes paid or payable in cash to (ii) the Company’s interest expense plus certain mandatory principal payments plus restricted payments, each as defined in the credit agreement governing the ABL Facility. Since the inception of the new ABL Facility in 2011, the Company has not been required to meet the fixed charge coverage ratio as the Company’s excess availability has exceeded the minimum thresholds.

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the Guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

 

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The ABL Facility contains certain covenants that limit the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

On September 21, 2012, Ply Gem Industries completed an amendment to its ABL Facility to permit the refinancing of its 13.125% Senior Subordinated Notes with unsecured notes rather than subordinated notes. No other terms or provisions were modified or changed in conjunction with this amendment.

As of March 30, 2013, Ply Gem Industries had approximately $141.1 million of contractual availability and approximately $97.1 million of borrowing base availability under the new ABL Facility, reflecting $65.0 million of borrowings outstanding and approximately $6.4 million of letters of credit and priority payables reserves.

On April 3, 2013, Ply Gem Industries amended its ABL Facility. Among other things, the amendment to the ABL Facility: (i) increased the amount of debt that Ply Gem Holdings is permitted to incur under the tax receivables agreement from $65.0 million to $100.0 million, subject to the satisfaction of certain conditions, including Ply Gem Industries maintaining excess availability levels greater than the lesser of (x) 25% of the lesser of the borrowing base and aggregate commitments and (y) $17.5 million, and (ii) modified the change of control definition.

Senior Secured Asset-Based Revolving Credit Facility due 2013

Concurrently with the 11.75% Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into an ABL Facility. The prior ABL Facility initially provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit,

 

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swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In July 2009, we amended the prior ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million. As of December 31, 2011, there were no outstanding borrowings under the prior ABL Facility, as it was replaced with the new ABL Facility on January 26, 2011.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption and the redemption occurs within 90 days of the date of the closing of such equity offerings. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date. On or after October 15, 2015 and prior to October 15, 2016, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries’ and the Guarantors’ existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

The indenture governing the 9.375% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell

 

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assets, incur certain liens, enter into transactions with affiliates and consolidate, merge or sell Ply Gem Industries’ assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt as defined in the indenture in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.

13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million. Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses. The interest rate on the 13.125% Senior Subordinated Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest.

On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes. The loss recorded as a result of the debt transactions is discussed in the section “Gain (loss) on debt modification or extinguishment” below.

Gain (loss) on debt modification or extinguishment

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes during the year ended December 31, 2012, the Company performed

 

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an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 13.125% Senior Subordinated Notes and the 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. The Company incurred an early call premium of approximately $9.8 million in connection with this transaction, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes and approximately $1.5 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012. The Company also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes as a result of this transaction for the year ended December 31, 2012. The Company also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the 8.25% Senior Secured Notes issuance and purchase and redemption of the 11.75% Senior Secured Notes during the year ended December 31, 2011, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt. The Company determined that this transaction resulted predominantly in a modification but in some instances as an extinguishment as some creditors did not participate in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes. The Company incurred an early tender premium of approximately $49.8 million in conjunction with this transaction, of which approximately $38.9 million was recorded as a discount on the 8.25% Senior Secured Notes and approximately $10.9 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011. The Company also expensed approximately $0.8 million for the unamortized discount and $2.8 million for the unamortized debt issuance costs for the 11.75% Senior Secured Notes in this transaction for the year ended December 31, 2011. The Company also incurred approximately $25.9 million of costs associated with this transaction, of which approximately $13.6 million was recorded as debt issuance costs and approximately $12.3 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.

As a result of the ABL Facility refinancing during the first quarter of 2011, the Company evaluated the proper accounting treatment for the debt issuance costs associated with the prior ABL Facility and the new ABL Facility as there were certain members of the loan syndication that existed in both facilities and other members who were not participants in the new ABL Facility. Based on this evaluation, the Company expensed approximately $1.2 million of debt issuance costs as a loss on modification or extinguishment of debt and recorded approximately $2.1 million of debt issuance costs.

As a result of the $141.2 million redemption of the previous 9% Senior Subordinated Notes on February 16, 2010, the Company recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write-off of unamortized debt issuance costs. On February 12, 2010, as a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by affiliates of the Company’s controlling stockholders in exchange for equity of Ply Gem Prime valued at approximately $114.9 million, the Company recognized a gain on extinguishment

 

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of approximately $100.4 million, including the write-off of unamortized debt issuance costs of approximately $3.5 million. The $98.2 million gain on debt extinguishment was recorded separately in the accompanying consolidated statement of operations for the year ended December 31, 2010.

Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately $3.6 million and $27.9 million and a gain on debt extinguishment of approximately $98.2 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, as summarized in the table below.

 

     Year ended December 31,  
(amounts in thousands)   2012     2011     2010  

 

 

Gain (loss) on extinguishment of debt:

     

Tender premium

  $      $ (10,883   $   

11.75% Senior Secured Notes unamortized discount

           (775       

11.75% Senior Secured Notes unamortized debt issuance costs

           (2,757       

13.125% Senior Subordinated Notes call premium

    (1,487              

13.125% Senior Subordinated Notes unamortized discount

    (299              

13.125% Senior Subordinated Notes unamortized debt issuance costs

    (372              
 

 

 

 
    (2,158     (14,415       

Carrying value of 9% Senior Subordinated Notes

                  360,000   

9% Senior Subordinated Notes unamortized debt issuance costs

                  (5,780

9% Senior Subordinated Notes unamortized premium

                  100   

Reacquisition price of 9% Senior Subordinated Notes

                  (256,133
 

 

 

 
                  98,187   

Loss on modification of debt:

     

Third party fees for 8.25% Senior Secured Notes

           (12,261       

Unamortized debt issuance costs for prior ABL Facility

           (1,187       

Third party fees for 9.375% Senior Notes

    (1,449              
 

 

 

 
    (1,449     (13,448       
 

 

 

 

Total gain (loss) on modification or extinguishment of debt

  $ (3,607   $ (27,863   $ 98,187   

 

 

Liquidity requirements

We intend to fund our ongoing capital and working capital requirements, including our internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under our ABL Facility. We believe that we will continue to meet our liquidity requirements over the next 12 months. We believe that our operating units are positive cash flow generating units and will continue to sustain their operations without any significant liquidity concerns. The performance of these operating units is significantly impacted by the performance of the housing industry, specifically single family housing starts and the repair and remodeling activity. Any unforeseen or unanticipated downturn in the housing industry could have a negative impact on our liquidity position.

Management anticipates that our current liquidity position, as well as expected cash flows from our operations should be sufficient to meet ongoing operational cash flow needs, capital expenditures, debt service obligations, and other fees payable under other contractual

 

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obligations for the foreseeable future. As of March 30, 2013, we had cash and cash equivalents of approximately $11.2 million, $141.1 million of contractual availability under the ABL Facility and approximately $97.1 million of borrowing base availability. As of December 31, 2012, we had cash and cash equivalents of approximately $27.2 million, $191.2 million of contractual availability under the ABL Facility and approximately $113.4 million of borrowing base availability. Given our focus on product innovation and development as well as streamlining certain manufacturing processes, we anticipate that our capital expenditures will be in the range of approximately 2.0% to 2.5% of net sales for the year ending December 31, 2013. Historically, we have been able to manage our capital expenditures based on market conditions for the new construction and repair and remodeling markets during any given fiscal year.

In order to further supplement the Company’s operating cash flow, the Company has from time to time opportunistically accessed capital markets based on prevailing economic and financial conditions. Based on market conditions, the Company may elect to pursue additional financing alternatives in the future.

Contractual obligations

The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2012. Interest on the 8.25% Senior Secured Notes and the 9.375% Senior Notes is fixed. Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.9%. Actual interest rates for future periods may differ from those presented here.

 

(amounts in thousands)  

Total

Amount

   

Less than

1 year

    1 - 3 Years     3 - 5 Years    

More than

5 years

 

 

   

 

 

 

Long-term debt(1)

  $ 1,071,000      $      $      $ 231,000      $ 840,000   

Interest payments(2)

    455,857        86,359        172,718        162,130        34,650   

Non-cancelable lease commitments(3)

    112,698        18,861        32,225        22,768        38,844   

Purchase obligations(4)

    78,660        78,660                        

Other long-term liabilities(5)

    11,319        1,131        2,264        2,264        5,660   
 

 

 

   

 

 

 
  $ 1,729,534      $ 185,011      $ 207,207      $ 418,162      $ 919,154   

 

   

 

 

 

 

(1)   Long-term debt is shown before discount, and consists of the 9.375% Senior Notes, 8.25% Senior Secured Notes, and the ABL Facility. For more information concerning the long-term debt, see “—Liquidity and capital resources” above.

 

(2)   Interest payments for variable interest debt are based on current interest rates.

 

(3)   Non-cancelable lease commitments represent lease payments for facilities and equipment.

 

(4)   Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. These obligations are related primarily to inventory purchases under a 2013 contract that was finalized during 2012.

 

(5)   Other long term liabilities include pension obligations which are estimated based on our 2012 annual funding requirement. Because we are unable to reliably estimate the timing of future tax payments related to uncertain tax positions, certain tax related obligations of approximately $3.5 million, including interest of approximately $0.9 million, have been excluded from the table above.

 

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The following table summarizes our contractual cash obligations under financing arrangements and lease commitments, including interest amounts, as of December 31, 2012, on a pro forma basis after giving effect to the Reorganization Transactions, this offering and the application of the net proceeds of this offering. Interest on the 8.25% Senior Secured Notes and the 9.375% Senior Notes is fixed. Interest on the ABL Facility is variable and has been presented at the average rate of approximately 2.9%. Actual interest rates for future periods may differ from those presented here.

 

(amounts in thousands)   

Total

Amount

    

Less than

1 year

     1 - 3 years      3 - 5 years     

More than

5 years

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt(1)

   $                $                $                $                $            

Interest payments(2)

              

Non-cancelable lease commitments(3)

              

Purchase obligations(4)

              

Other long-term liabilities(5)

              
  

 

 

 
   $         $         $         $         $     

 

 

 

(1)   Long-term debt is shown before discount, and consists of our 9.375% Senior Notes, 8.25% Senior Secured Notes, and the ABL Facility. For more information concerning the long-term debt, see “—Liquidity and capital resources” above.

 

(2)   Interest payments for variable interest debt are based on current interest rates.

 

(3)   Non-cancelable lease commitments represent lease payments for facilities and equipment.

 

(4)   Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price and the approximate timing of the transaction. These obligations are related primarily to inventory purchases under a 2013 contract that was finalized during 2012.

 

(5)   Other long term liabilities include pension obligations which are estimated based on our 2012 annual funding requirement. Because we are unable to reliably estimate the timing of future tax payments related to uncertain tax positions, certain tax related obligations of approximately $3.5 million, including interest of approximately $0.9 million, have been excluded from the table above.

In addition to the items listed in the tables presented above, we have a potential obligation related to certain tax issues of approximately $3.5 million, including interest of approximately $0.9 million. The timing of the potential tax payments is unknown.

As discussed in “Certain relationships and related party transactions,” under an advisory agreement we will pay an annual fee to an affiliate of CI Capital Partners each year based on 2% of EBITDA. In addition, a termination fee equal to $17.5 million will be payable to an affiliate of CI Capital Partners upon the consummation of this offering in connection with the termination of such advisory agreement. Neither of these fees have been included in the above tables.

We also have a potential liability in connection with the tax receivable agreement which we will enter into upon the closing of this offering. The tax receivable agreement will obligate us to make payments to the Tax Receivable Entity generally equal to 85% of the applicable cash savings that we actually realize as a result of NOL carryovers. We will retain the benefit of the remaining 15% of these tax savings. The amounts we may be required to pay could be significant and are not reflected in the above tables. See “Risk factors—Risks associated with our business—We will be required to pay an affiliate of our current stockholders for certain tax benefits, including net operating loss carryovers, we may claim, and the amounts we may pay could be significant” and “Certain relationships and related party transactions—Tax receivable agreement.”

 

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Off-balance sheet arrangements

We have no off-balance sheet arrangements.

Inflation; seasonality

Our performance is dependent to a significant extent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence and unemployment. We do not believe that inflation has had a material impact on our business, financial condition or results of operations during the past three fiscal years.

The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather conditions during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and the new home construction sectors. Our sales in both segments are usually lower during the first and fourth quarters. Since a portion of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. In addition, the demand for cash to fund our working capital is greater from late in the fourth quarter through the first quarter.

Recent accounting pronouncements

See Note 1 to our consolidated financial statements for recent accounting pronouncements, which are included in this prospectus.

Interest rate risk

Our principal interest rate exposure relates to the loans outstanding under our ABL Facility, which provided for borrowings of up to $212.5 million as of March 30, 2013, bearing interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin or the base rate plus an applicable interest margin. Assuming the ABL Facility was fully drawn as of March 30, 2013, each quarter point increase or decrease in the interest rate would change our interest expense by approximately $0.5 million per year. At March 30, 2013, we were not party to any interest rate swaps to manage our interest rate risk. In the future, we may enter into interest rate swaps, involving exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.

Foreign currency risk

Our results of operations are affected by fluctuations in the value of the U.S. dollar as compared to the value of the Canadian dollar. For the three months ended March 30, 2013, the net impact of foreign currency changes to our results of operations was a loss of approximately $33,000. The impact of foreign currency changes related to translation resulted in a decrease in stockholder’s deficit of approximately $0.8 million for the three months ended March 30, 2013. In 2012, the net impact of foreign currency changes to our results of operations was a gain of $0.4 million. The impact of foreign currency changes related to translation resulted in an increase in stockholder’s equity of approximately $0.8 million December 31, 2012. The revenue or expense reported by us as a result of currency fluctuations will be greater in times of U.S. dollar devaluation and less in times of U.S. dollar appreciation. We generally do not enter into derivative financial instruments to manage foreign currency exposure. At March 30, 2013, we did not have any significant outstanding foreign currency hedging contracts.

 

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Commodity pricing risk

We are subject to significant market risk with respect to the pricing of our principal raw materials, which include PVC resin, aluminum and wood. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly. We manage the exposure to commodity pricing risk by increasing our selling prices for corresponding material cost increases, continuing to diversify our product mix, strategic buying programs and vendor partnering. According to the London Metal Exchange, the price of aluminum decreased approximately 4.4% for the three months ended March 30, 2013 compared to the three months ended March 31, 2012. Conversely, the average market price for PVC resin was estimated to have increased approximately 3.3% for 2013 compared to 2012. According to the London Metal Exchange, the price of aluminum decreased approximately 15.8% for the year ended December 31, 2012 compared to the year ended December 31, 2011. Conversely, the average market price for PVC resin was estimated to have increased approximately 5.5% for 2012 compared to 2011.

Inflation

We do not believe that inflation, net of our corresponding price increases for material costs, has had a material effect on our business, financial condition or results of operations. Our lease payments related to our sale/leaseback agreement include an annual increase based on the Consumer Price Index (“CPI”), which could expose us to potential higher costs in years with high inflation. The CPI increase for the last twelve months ended March 2013 was approximately 1.5%.

Consumer and commercial credit

As general economic conditions in the United States continue to be challenging for us and our customers, we have increased our focus on the credit worthiness of our customers. These procedures are necessary to ensure that our allowance for doubtful accounts is adequate and that we are performing proper due diligence prior to initiating sales. We will continue to monitor these statistics to ensure that issues, if any, are identified in a timely manner to reduce risk and minimize our bad debt exposure. If general economic conditions continue to worsen, additional reserves may be necessary. For the years ended December 31, 2012, 2011, and 2010, the Company’s bad debt expense was $0.8 million, $1.5 million and $3.2 million, respectively.

Labor force risk

Our manufacturing process is highly engineered but involves manual assembly, fabrication, and manufacturing processes. We believe that our success depends upon our ability to employ, train, and retain qualified personnel with the ability to design, utilize and enhance these services and products. In addition, our ability to expand our operations depends in part on our ability to increase our labor force as the U.S. housing market recovers and minimize labor inefficiencies. A significant increase in the wages paid by competing employers could result in a reduction of our labor force, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structure could increase, our margins could decrease and any growth potential could be impaired. Historically, the Company has believed that the lag period between breaking ground on a new housing start and the utilization of our products on the exterior of a home was 90 days. The Company believes that this labor force risk has expanded the historical 90 day lag period to 120 days or more.

 

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Business

Company overview

We are a leading manufacturer of exterior building products in North America, operating in two reportable segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors, which comprised approximately 59% and 41% of our sales, respectively, for the fiscal year ended December 31, 2012 and approximately 54% and 46% of our sales, respectively, for the three months ended March 30, 2013. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl and composite railing, stone veneer and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Western Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. We also manufacture vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling us to bundle complementary and color-matched products and accessories with our core products. We believe that our comprehensive product portfolio and geographically diverse, low cost manufacturing platform allow us to better serve our customers and provide us with a competitive advantage over other exterior building products suppliers. For the year ended December 31, 2012, we had net sales of $1,121.3 million, adjusted EBITDA of $127.3 million and a net loss of $39.1 million. For the three months ended March 30, 2013, we had net sales of $257.1 million, adjusted EBITDA of $12.1 million and a net loss of $28.1 million.

Additional information concerning our business is set forth in “Management’s discussion and analysis of financial condition and results of operations.”

History

Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, on January 23, 2004 by affiliates of CI Capital Partners for the purpose of acquiring Ply Gem Industries from Nortek. The Ply Gem acquisition was completed on February 12, 2004. Prior to the Ply Gem acquisition, our business was known as the Windows, Doors and Siding division of Nortek, where the business operated as a holding company with a broad set of brands. Since the Ply Gem acquisition, we have acquired seven additional businesses, and entered into an agreement to acquire one additional business, to complement and expand our product portfolio and geographical diversity. Gary E. Robinette, our President and Chief Executive Officer, joined Ply Gem in October 2006, and has employed the strategy of transitioning Ply Gem to an integrated and consolidated business model under the Ply Gem brand. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime. Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity.

The following is a summary of Ply Gem’s acquisition history:

 

 

On August 27, 2004, Ply Gem acquired MWM Holding, a manufacturer of vinyl, wood, wood-clad, composite, impact and aluminum windows.

 

 

On February 24, 2006, Ply Gem acquired AWC, a manufacturer of aluminum and vinyl windows products. This acquisition supported our national window strategy and today operates under common leadership with our other U.S. window businesses.

 

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On October 31, 2006, Ply Gem completed the acquisition of MHE, a leading manufacturer of vinyl siding, aluminum siding, injection molded shutters and vinyl, aluminum and injection molded accessories. MHE is part of our Siding, Fencing and Stone segment and operates under common leadership with our siding business.

 

 

On September 30, 2007, Ply Gem completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business, which we have named Pacific Windows, a leading manufacturer of premium vinyl windows and patio doors.

 

 

On October 31, 2008, Ply Gem acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer), a manufacturer of stone veneer products. Ply Gem Stone is part of our Siding, Fencing and Stone segment and operates under common leadership with our siding business.

 

 

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck, a composite products development company.

 

 

On April 9, 2013, Ply Gem acquired all of the capital stock of Gienow, a manufacturer of windows and doors in Western Canada.

 

 

On May 6, 2013, Ply Gem entered into a share purchase agreement to acquire all of the capital stock of Mitten, a leading manufacturer of vinyl siding and accessories in Canada.

Our competitive strengths

We believe the following competitive strengths differentiate us from our competitors and are critical to our continued success:

 

 

Leading Manufacturer of Exterior Building Products.  Based on our internal estimates and industry experience, we believe we have established leading positions in many of our core product categories including: No. 1 in vinyl siding in the U.S.; No. 1 in aluminum accessories in the U.S.; No. 2 in vinyl and aluminum windows in the U.S.; No. 1 in windows and doors in Western Canada; and a leading position in vinyl siding and accessories in Canada. We achieved this success by developing a broad offering of high quality products and providing superior service to our customers. We are one of the few companies in our industry that operate a geographically diverse manufacturing platform capable of servicing our customers across the entire United States and Western Canada. The scale of our operations also positions us well as customers look to consolidate their supplier base. We believe our broad offering of leading products, geographically diverse manufacturing platform and long-term customer relationships make us the manufacturer of choice for our customers’ exterior building products needs.

 

 

Comprehensive Product Portfolio with Strong Brand Recognition.  We offer a comprehensive portfolio of over twenty exterior building product categories covering a full range of price points. Our broad product line gives us a competitive advantage over other exterior building product suppliers who provide a narrower range of products by enabling us to provide our customers with a differentiated value proposition to meet their own customers’ needs. Our leading brands, such as Ply Gem®, Mastic® Home Exteriors, Variform®, Napco®, Georgia-Pacific (which we license) and Great Lakes® Window, are well recognized in the industry. Many of our customers actively support our brands and typically become closely tied to our brands through joint marketing and training, fostering long-term relationships under the common goal of delivering a quality product.

 

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We believe a distinguishing factor in our customers’ selection of Ply Gem as a supplier is our innovation and quality for which our brands are known. As a result, our customers’ positive experiences with one product or brand affords us the opportunity to cross-sell additional products and effectively introduce new products. Since 2007, we have successfully implemented a more unified brand strategy to expand our cross-selling opportunities between our siding and window product offerings. For instance, we consolidated certain window product offerings under the Ply Gem brand to offer a national window platform to our customers, which we believe represents a comprehensive line of new construction and home repair and remodeling windows. Our unified branding and cross-selling strategy has produced market share gains across all product categories since 2011 with a significant retail home center, a large building products distributor, a large national builder, and several regional home builders. With our extensive product line breadth, industry-leading brands and national platform, we believe we can provide our current and future customers with a more cost-effective, single source from which to purchase their exterior building products.

 

 

Multi-Channel Distribution Network Servicing a Broad Customer Base.  We have a multi-channel distribution network that serves both the new construction and home repair and remodeling end markets through our broad customer base of specialty and wholesale distributors, retail home centers, lumberyards, remodeling dealers and builders. Our multi-channel distribution strategy has increased our sales and penetration within these end markets, while limiting our exposure to any one customer or channel, such that our top ten customers only accounted for approximately 45.9% of our net sales in 2012. We believe our strategy enables us to minimize channel conflict, reduce our reliance on any one channel and reach the greatest number of end customers while providing us with the ability to increase our sales and to sustain our financial performance through economic fluctuations.

 

 

Balanced Exposure to New Construction and Home Repair and Remodeling.  Our products are used in new construction and home repair and remodeling, with our diversified product mix reducing our overall exposure to any single sector. We operate in two reportable segments: (i) Siding, Fencing and Stone, which has been weighted towards home repair and remodeling, and (ii) Windows and Doors, which has historically focused on new construction. We have begun to expand our presence in the home repair and remodel window sector through the launch of a new series of repair and remodel window products, focusing on the unique requirements of this sector while leveraging our existing customer relationships. This is one of several initiatives that have been well received by our customers and that complement our established product offerings by utilizing our national sales force to sell multiple products in our portfolio. For example, our Mastic Window product, which launched in 2011, has produced favorable results with rapid net sales growth in the repair and remodeling market by leveraging our existing relationships within this sector. We believe the diversity of our end markets and products provides us with a unique opportunity to capitalize on the overall housing market recovery.

 

 

Highly Efficient, Low Cost Operating Platform.  Since mid-2006, we have closed or consolidated eight plants, generating savings of over $30 million annually, and significantly reduced our workforce. Since 2006, we also invested approximately $98.3 million in capital expenditures, including new product introductions and upgrades to equipment, facilities and technology, to continue improving our vertically integrated manufacturing platform. For example, our multi-plant window manufacturing platform allows us to service our customers with minimal lead times across a broad geographic coverage area, providing us a competitive advantage with the ability to operate in just-in-time fashion. This capability provides a unique service proposition

 

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to our customers while allowing us to maintain minimal inventory levels in our window product offerings. In addition, as a result of our PVC resin purchasing scale (we are one of the largest purchasers in North America based on industry estimates), we are able to secure favorable prices, terms and input availability through various cycles. Furthermore, since 2008, we have centralized numerous back office functions to our corporate office that previously resided in our business segments. This enabled us to maximize our efficiencies and minimize selling, general, and administrative expenses during the U.S. housing downturn.

Through our strong cost controls, vertically-integrated manufacturing platform, continued investment in technology, focus on safety and significant purchasing scale, we have improved efficiency in our manufacturing facilities while maintaining a low fixed cost structure of approximately 21% of our total cost structure, which provides significant operating leverage as the housing market recovers. Furthermore, our manufacturing facilities are among the safest in all of North America with four of them having received the highest federal, state and/or provincial safety award and rating. We believe that we have one of the most efficient and safest operating platforms in the exterior building products industry, helping to drive our profitability.

 

 

Proven Track Record of Acquisition Integration and Cost Savings Realization.  Our seven acquisitions since early 2004 have enhanced our geographic diversity, expanded our product offerings and enabled us to enter new product categories. Our acquisition of United Stone Veneer (now branded Ply Gem Stone) in 2008 enabled us to enter the stone veneer product category, which is one of the fastest growing categories of exterior cladding products. We have maintained a disciplined focus on integrating new businesses, rather than operating them separately, and have realized meaningful synergies as a result. Through facility and headcount rationalizations, strategic sourcing and other manufacturing improvements, we have permanently eliminated over $50 million in aggregate costs. We view our ability to identify, execute and integrate acquisitions as one of our core strengths and expect that this offering will significantly improve our financial position and flexibility, enabling us to lead the continued consolidation of the exterior building products industry.

 

 

Strong Management Team with Significant Ownership.  We are led by a committed senior management team that has an average of over 20 years of relevant industry experience. Our current senior management, with financial and advisory support from affiliates of CI Capital Partners LLC, has successfully transformed Ply Gem from operating as a holding company with a broad set of brand offerings to an integrated business model under the Ply Gem brand, positioning our Company to grow profitably and rapidly as the housing market recovers. As of May 5, 2013, after giving effect to the Reorganization Transactions (assuming a public offering price of $        per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)), members of our management team held common stock and stock awards representing approximately         % of the shares of our Company, which will decline to         % upon completion of this offering (or     % if the underwriters exercise their over-allotment option in full).

Our business strategy

We are pursuing the following business and growth strategies:

 

 

Capture Growth Related to Housing Market Recovery.  As a leading manufacturer of exterior building products, we intend to capitalize on the continued recovery in the new construction market and the anticipated recovery in the home repair and remodeling market. The NAHB

 

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2012 estimate of single family housing starts was 535,000, which was approximately 49% below the 50-year average, representing a significant opportunity for growth as activity improves to rates that are more consistent with historical levels. Furthermore, we believe that the underinvestment in homes during the recent recession and the overall age of the U.S. housing stock will drive significant future spending for home repair and remodeling.

We expect homeowners’ purchases to focus on items that provide the highest return on investment, have positive energy efficiency attributes and provide potential cost savings. Our broad product offering addresses expected demand growth from all of these key trends through our exposure to the new construction and the home repair and remodeling end markets, diverse price points, the high recovery value for home improvements derived from our core product categories and the ability to provide products that qualify for energy efficiency rebate and tax programs currently in effect or under consideration.

 

 

Continue to Increase Market Penetration.  We intend to increase the market penetration of our siding, fencing and stone products and our window and door products by leveraging the breadth of our product offering and broad geographical footprint to serve customers across North America and by pursuing cross-selling opportunities. Additionally, our continued investments in product innovation and quality, coupled with strong customer service, further enhance our ability to capture increased sales in each of our core product categories. In 2012, we maintained our U.S. vinyl siding leading market position at approximately 36.0%. We increased our market position to 36.0% in 2011 from 32.3% in 2010 due in part to a significant customer win in the retail sales channel as well as with a top national builder. In 2012, we also continued to achieve strategic market share gains obtaining new regional window business with a large home center.

The national builder win by our siding business in 2011 was an existing top ten customer in our window business. We believe that this demonstrates the substantial opportunity across our product categories to cross-sell and bundle products, thereby increasing revenues from our existing channel partners and industry relationships. Another example of this cross-selling opportunity is our 2010 introduction of a new vinyl windows line under our Ply Gem brand as well as under our Mastic Home Exteriors brand, historically associated with vinyl siding products. We expect to build upon our market positions as the housing market recovers from its current levels and to further enhance our leading positions.

 

 

Expand Brand Coverage and Product Innovation.  Ply Gem’s brand building efforts extend across multiple media, including national trade journals, website marketing, social media, and national consumer magazines and broadcast outlets, both in the United States and Canada, resulting in over 10 million trade impressions and more than 200 million consumer impressions in 2012. Significant brand recognition in 2012 included Fox News “Fox and Friends” morning program, Better Homes and Gardens Magazine and The New York Times, each focusing on Ply Gem’s ability to deliver a complete exterior as a single manufacturer, something we call “The Designed Exterior by Ply Gem.” Our products also frequently receive industry recognition. For example, Consumer Reports placed The Designed Exterior at the top of their list for “Five Trends you can take home from the International Builders Show” in 2012.

We will continue to increase the value of the Ply Gem brands by introducing new product categories for our customers and by developing innovative new products within our existing product categories. For example, we have developed a complete series of window products under the Ply Gem brand to target the higher margin home repair and remodeling window end market. Furthermore, our 2008 addition of stone veneer to our product offering in the Siding, Fencing and Stone segment provides existing siding customers with access to the fastest growing

 

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category of exterior cladding products. In 2013, we announced that we will be manufacturing and selling cellular PVC trim and mouldings, a low-maintenance alternative to traditional wood trim designed to work well with siding, within the estimated $1.4 billion residential trim market.

During 2012, we continued our focus on innovation by establishing a new entity under Ply Gem Industries, Foundation Labs, whose mission and purpose is to house product development from idea creation to product commercialization. By having dedicated resources committed to product development, we are investing in our future. The result of our commitment to product development and innovation has been demonstrated in the approximately $441.7 million of incremental annualized sales that we recognized for new products introduced from 2009 to 2012.

We also invest in our future and further brand development by pursuing certain strategic acquisitions if they fit our geographical footprint and strategic focus. For example, in April 2013 we acquired Gienow, a manufacturer of windows and doors in Western Canada, and in May 2013 we entered into a share purchase agreement to acquire Mitten, a leading manufacturer of vinyl siding and accessories in Canada. For additional information, see “Prospectus summaryRecent developments.” These acquisitions will provide us with a significant presence in Canada and provide us with operating efficiencies to drive further market gains.

 

 

Drive Operational Leverage and Further Improvements.  While we reduced our production capacity during the past several years, we have retained the flexibility to bring back idled lines, facilities and production shifts in order to increase our production as market conditions improve. This incremental capacity can be selectively restarted, providing us with the ability to match increasing customer demand levels as the housing market returns to historical levels of approximately one million or more single family housing starts without the need for significant capital investment. In our Windows and Doors segment, where we have historically focused on new construction, we believe that our new window products for home repair and remodeling will be able to drive increased volumes through these manufacturing facilities and enhance operating margins.

Over the past several years, we have significantly improved our manufacturing cost structure; however, there are opportunities for further improvements. We believe that the continued expansion of lean manufacturing and vertical integration in our manufacturing facilities, along with the further consolidation of purchases of key raw materials, supplies and services will continue to provide us with cost advantages compared to our competitors. In addition, the integration of our sales and marketing efforts across our product categories provides an ongoing opportunity to significantly improve our customer penetration and leverage the strength of our brands. Furthermore, we have centralized many back office functions into our corporate office in Cary, North Carolina, and believe that additional opportunities remain. We believe all of these factors should drive continued growth in profitability while improving our cash flow and capital efficiency.

Building products end markets

Demand for exterior building products, including siding, fencing, stone, windows and doors, is primarily driven by construction of new homes and repair and remodeling of existing homes, which are affected by changes in national and local economic and demographic conditions, employment levels, availability of financing, interest rates, consumer confidence and other economic factors.

 

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New home construction

Management believes that a U.S. housing recovery is underway on a national basis, supported by favorable demographic trends, historically low interest rates and consumers who are increasingly optimistic about the U.S. housing market. New construction in the United States experienced strong growth from the early 1990s to 2006, with housing starts increasing at a compounded annual growth rate of 3.8%. However, from 2006 to 2012, single family housing starts are estimated to have declined 64% according to the NAHB. While the industry has experienced a period of severe correction, management believes that the long-term economic outlook for new construction in the United States is favorable and supported by an attractive interest rate environment, increasing consumer confidence, improving employment growth and strong demographics, as new household formations and increasing immigration drives demand for starter homes. According to the Joint Center for Housing Studies of Harvard University, net new household formations between 2010 and 2020 are expected to be approximately 11.8 million units.

Moreover, during 2012, single family housing starts are estimated to have increased 23.2% to 535,000 compared to 2011, having declined by 7.9% during the 2010 to 2011 period. Finally, the NAHB is currently forecasting single family housing starts to further increase in 2013 and 2014 by 24.2% and 28.9%, respectively.

Home repair and remodeling

Management believes that the U.S. home repair and remodeling products market is poised for a recovery. Since the early 1990s and through 2006, demand for home repair and remodeling products in the United States increased at a compounded annual growth rate of 4.3%, according to the U.S. Census Bureau, as a result of strong economic growth, low interest rates and favorable demographics. However, beginning in 2007 the ability for homeowners to finance repair and remodeling expenditures, such as replacement windows or vinyl siding, has been negatively impacted by a general tightening of lending requirements by financial institutions and the significant decrease in home values, which limited the amount of home equity against which homeowners could borrow. Management believes that expenditures for home repair and remodeling products are also affected by consumer confidence that continued to be depressed during 2012 due to general economic conditions, debt ceiling and national budget deliberations, and unemployment levels. Management believes the long-term economic outlook of the demand for home repair and remodeling products in the United States is favorable and supported by the move towards more energy-efficient products, recent underinvestment in home maintenance and repair, and an aging housing stock.

Our business

Financial information about our segments is included in the notes to our consolidated financial statements and included elsewhere in this prospectus.

Siding, Fencing and Stone segment

Products

In our Siding, Fencing and Stone segment, our principal products include vinyl siding and skirting, vinyl and aluminum soffit, aluminum trim coil, cellular PVC trim and mouldings, J-channels, wide crown molding, window and door trim, F-channels, H-molds, fascia, undersill trims, outside/inside

 

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corner posts, rain removal systems, injection molded designer accents such as shakes, shingles, scallops, shutters, vents and mounts, vinyl fence, vinyl and composite railing and stone veneer. We sell our siding and accessories under our Variform®, Napco®, Mastic® Home Exteriors and Cellwood® brand names and under the Georgia-Pacific brand name through a private label program. We also sell our vinyl siding and accessories to Lowe’s under our Durabuilt® private label brand name. Our cellular PVC Trim products are sold under our Ply Gem® Trim and Mouldings brand name. Our vinyl and vinyl-composite fencing and railing products are sold under our Kroy® and Kroy Express brand names. Our stone veneer products are sold under our Ply Gem Stone brand name. A summary of our product lines is presented below according to price point:

 

 

    

Mastic® Home

Exteriors

   Variform®    Napco®    Cellwood ®    Durabuilt®    Georgia Pacific    Kroy®    Ply Gem® Stone    Ply Gem ®
Trim and
Mouldings(1)
Specialty/Super Premium    Cedar Discovery® Structure® EPS Premium Insulated Siding    Heritage
Cedar™
Climaforce™
   Cedar
Select®
American
Essence™
   Cedar
Dimensions™
   670
Series™
Hand
Split 650
Series™
Shingle
Siding
660
Series™
Round
Cut
Siding
   Cedar
Spectrum™
Caliber
      Fieldstone
Tuscan
Fieldstone
Shadow
Ledgestone

Cut
Cobblestone

Cobblestone
Ridgestone

Riverstone
Brick

True
Stack

  
Premium    Quest® T-Lok® Barkwood® Liberty Elite® Board + Batten    Timber
Oak
Ascent™
Vortex
Extreme™
Board +
Batten
   American
Splendor®
Board +
Batten™
   Dimensions®
Board +
Batten
   480
Series™
440
Series™
   Cedar
Lane®
Select
Board +
Batten
   Elegance
Vinyl
Fence
and
Composite
Rail
      Trim
Boards

Corners

Post
Wraps

Mouldings

Standard    Carvedwood 44® Silhouette Classic® Ovation™ Charleston Beaded®    Camden
Pointe®
Nottingham®
Ashton
Heights®
Victorian
Harbor®
   American
Herald®
American
Tradition
American
76
Beaded®
   Progressions®
Colonial
Beaded
   450
Series™
Beaded
   Heritage
Hill™
Forest
Ridge®
Shadow
Ridge®
Castle
Ridge®
Somerset™
Beaded
   Performance
Vinyl
Fence
and Rail
     
Economy    Mill Creek® Brentwood® Eclipse    Contractors
Choice®
   American
Comfort®
   Evolutions®    410
Series™
   Chatham
Ridge®
Vision
Pro®
Parkside®
Oakside®
   Classic
Vinyl
Fence
     

 

 

(1)   The cellular PVC Trim product category launched during the first quarter of 2013.

The breadth of our product lines and our multiple brand and price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end users (new construction and home repair and remodeling).

Customers and distribution

We have a multi-channel distribution network that serves both the new construction and the home repair and remodeling sectors, which exhibit different, often counter-balancing, demand characteristics. In conjunction with our multiple brand and price point strategy, we believe our multi-channel distribution strategy enables us to increase our sales and sector penetration while minimizing channel conflict. We believe our strategy reduces our dependence on any one channel, which provides us with a greater ability to sustain our financial performance through economic fluctuations.

We sell our siding and accessories to specialty distributors (one-step distribution) and to wholesale distributors (two-step distribution). Our specialty distributors sell directly to remodeling contractors and builders. Our wholesale distributors sell to retail home centers and

 

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lumberyards who, in turn, sell to remodeling contractors, builders and consumers. In the specialty channel, we have developed an extensive network of approximately 800 independent distributors, serving over 22,000 contractors and builders nationwide. We are well-positioned in this channel as many of these distributors are both the largest and leading consolidators in the industry. In the wholesale channel, we are the sole supplier of vinyl siding and accessories to BlueLinx (formerly a distribution operation of the Georgia-Pacific Corporation), one of the largest building products distributors in the United States. Through BlueLinx and our BlueLinx dedicated sales force, our Georgia-Pacific private label vinyl siding products are sold at major retail home centers, lumberyards and manufactured housing manufacturers. A portion of our siding and accessories is also sold directly to home improvement centers. Our growing customer base of fencing and railing consists of fabricators, distributors, retail home centers and lumberyards. Our customer base of stone veneer products consists of distributors, lumberyards, retailers and contractors.

For the three months ended March 30, 2013, our largest customer was BlueLinx, which comprised 20.0% of the net sales of our Siding, Fencing and Stone segment. For the years ended December 31, 2012 and 2011, our largest customer was ABC Supply Co., Inc., which comprised 17.1% and 14.7% of the net sales of our Siding, Fencing and Stone segment, respectively.

Production and facilities

Vinyl siding, skirting, soffit and accessories are manufactured in our Martinsburg, West Virginia, Jasper, Tennessee, Stuarts Draft, Virginia and Kearney, Missouri facilities, while all metal products are produced in our Sidney, Ohio facility. The majority of our injection molded products such as shakes, shingles, scallops, shutters, vents and mounts are manufactured in our Gaffney, South Carolina facility. The cellular PVC trim and mouldings products are manufactured in Kearney, Missouri. The vinyl, metal, and injected molded plants have sufficient capacity to support planned levels of sales growth for the foreseeable future. Our fencing and railing products are currently manufactured at our York, Nebraska and Fair Bluff, North Carolina facilities. The fencing and railing plants have sufficient capacity to support our planned sales growth for the foreseeable future. Our stone veneer products are manufactured at our Middleburg, Pennsylvania facility. Our manufacturing facilities are among the safest in all of North America with three of them having received the highest federal and/or state OSHA safety award and rating.

Raw materials and suppliers

PVC resin and aluminum are major components in the production of our Siding, Fencing and Stone products. PVC resin and aluminum are commodity products and are available from both domestic and international suppliers. Changes in PVC resin and aluminum prices have a direct impact on our cost of products sold. Historically, we have been able to pass on the price increases to our customers. The results of operations for individual quarters can be negatively impacted by a delay between the time of raw material cost increases and price increases that we implement in our products, or conversely can be positively impacted by a delay between the time of a raw material price decrease and competitive pricing moves that we implement accordingly.

Competition

We compete with other national and regional manufacturers of vinyl siding, aluminum, cellular PVC, fencing and stone products. We believe we are currently the largest manufacturer of vinyl

 

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siding in North America. Our vinyl siding competitors include CertainTeed, Associated Materials, Inc., Royal Building Products and smaller, regional competitors. Based on our internal estimates and industry experience, we believe that we have a U.S. vinyl siding market position of 36.0%, consistent with 2011. Our aluminum accessories competitors include Alsco, Gentek and other smaller regional competitors. Significant growth in vinyl fencing and railing has attracted many new entrants, and the sector today is fragmented. Our cellular PVC Trim and Moulding competitors include Azek, Inteplast, Kommerling (KOMA), Jain (Excel), Wolfpac (Veratex), Tapco (Kleer), CertainTeed and Royal Building Products. Our fencing and railing competitors include U.S. Fence, Homeland, Westech, Bufftech, and Azek. Our stone veneer competitors include Boral, Eldorado Stone, Coronado Stone and smaller, regional competitors. We generally compete on product quality, breadth of product offering, sales and service support. In addition to competition from other vinyl siding, fencing and stone products, our products face competition from alternative materials, such as wood, metal, fiber cement and masonry. Increases in competition from other exterior building products manufacturers and alternative building materials could cause us to lose customers and lead to net sales decreases.

Intellectual property

We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Siding, Fencing and Stone segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe the Siding, Fencing and Stone segment is dependent on any one of our trademarks, we believe that our trademarks are important to the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.

Seasonality

Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Because a portion of our overhead and expenses are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.

We generally carry increased working capital during the first half of a fiscal year to support those months where customer demand exceeds production capacity. We believe that this is typical within the industry.

Backlog

Our Siding, Fencing and Stone segment had a backlog of approximately $8.8 million at March 30, 2013, $9.5 million at December 31, 2012 and $8.5 million at December 31, 2011. We filled 100% of the backlog at December 31, 2011 during 2012. We expect to fill 100% of the orders that were included in our backlog at December 31, 2012 and March 30, 2013.

 

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Windows and Doors segment

Products

In our Windows and Doors segment, our principal products include vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and fiberglass entry doors that serve both the new construction and the home repair and remodeling sectors in the United States and Canada. Our products in our Windows and Doors segment are sold under the Ply Gem® Windows, Great Lakes® Window, Mastic® by Ply Gem, and Ply Gem® Canada brands. In the past, we have also sold our windows and doors under our CWD Windows and Doors brand names. A summary of our current product lines is presented below according to price point:

 

      Ply Gem U.S. Windows    Mastic by Ply Gem    Great Lakes Window    Ply Gem Canada

 

   New Construction    Replacement       Replacement    New Construction
Specialty/
Super- Premium
   Mira® Premium Series    Select Series   

Mastic 5000

Series

  

Uniframe®

EcoSMART

  

Regency®

Ambassador®

Fusion®

Premium    Pro Series -
West
   Premium Series   

Mastic 4000

Series

   Lifestyles®    Envoy®  Diplomat®
Concorde®
Standard    Pro Series - East    Pro Series   

Mastic 3000

Series

   Seabrooke®    Pro Series
Economy    Builder Series    Contractor
Series
        Bayshore®     

 

We continue introducing new products to the portfolio which allow us to enter or further penetrate new distribution channels and customers. The breadth of our product lines and our multiple price point strategy enable us to target multiple distribution channels (wholesale and specialty distributors, retailers and manufactured housing) and end user markets (new construction and home repair and remodeling).

Customers and distribution

We have a multi-channel distribution and product strategy that enables us to serve both the new construction and the home repair and remodeling sectors. By offering this broad product offering and industry leading service, we are able to meet the local needs of our customers on a national scale. This strategy has enabled our customer base (existing and new) to simplify their supply chain by consolidating window suppliers. Our good, better, best product and price point strategy allows us to increase our sales and sector penetration while minimizing channel conflict. This strategy reduces our dependence on any one channel, providing us with a greater ability to sustain our financial performance through economic fluctuations.

The new construction product lines are sold for use in new residential and light commercial construction through a highly diversified customer base, which includes independent building material dealers, regional/national lumberyard chains, builder direct/OEMs and retail home centers. Our repair and remodeling window products are primarily sold through independent home improvement dealers, one-step distributors and big box retail outlets. Dealers typically market directly to homeowners or contractors in connection with remodeling requirements while distributors concentrate on local independent retailers.

In Canada, sales of product lines for new construction are predominantly made through direct sales to builders and contractors, while sales for repair and remodeling are made primarily through retail lumberyards. Ply Gem Canada products are distributed through nine company-owned distribution centers.

 

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Our sales to our five largest window and door customers represented 30.8%, 28.6% and 28.9% of the net sales of our Windows and Doors segment for the three months ended March 30, 2013 and the years ended December 31, 2012 and 2011, respectively.

Production and facilities

Our window and door products leverage a network of vertically integrated production and distribution facilities located in Virginia, Ohio, North Carolina, Georgia, Texas, California, Washington and Alberta, Canada. Our window and door manufacturing facilities have benefited from our continued investment and commitment to product development and product quality combined with increasing integration of best practices across our product offerings. In 2010, we began producing vinyl compound for our west coast facilities which improved our operating efficiency and resulted in lower production cost for these items. In 2010, we continued making upgrades to insulated glass production lines in anticipation of more stringent energy efficiency requirements driven by changes in building codes and consumer demand for Energy Star rated products.

While market conditions required us to close three facilities in 2009, all of our facilities have the ability to increase capacity in a cost effective manner by expanding production shifts. Any capacity increase may, however, initially be offset by labor inefficiencies or difficulties obtaining the appropriate labor force. Ongoing capital investments will focus upon new product introductions and simplification, equipment maintenance and cost reductions. Our manufacturing facility in Alberta, Canada received the highest provincial safety award during 2010, demonstrating our commitment to safety.

During 2012, our Windows and Doors segment streamlined its product offerings by realigning its SKUs to simplify the structure and manufacturing process while maximizing product features for our customers at competitive prices.

Raw materials and suppliers

PVC compound, wood, aluminum and glass are major components in the production of our window and door products. These products are commodity products available from both domestic and international suppliers. Historically, changes in PVC compound, aluminum billet and wood cutstock prices have had the most significant impact on our material cost of products sold in our Windows and Doors segment. We are one of the largest consumers of PVC resin in North America and we continue to leverage our purchasing power on this key raw material. The PVC resin compound that is used in our window lineal production is produced internally. The leveraging of our PVC resin buying power and our PVC resin compounding capabilities benefits all of our window companies. Our window plants have consolidated glass purchases to take advantage of strategic sourcing savings opportunities. In addition, we have continued to vertically integrate aluminum extrusion in our window plants.

Competition

The window and patio door sector remains fragmented, comprised primarily of local and regional manufacturers with limited product offerings. The sector’s competitors in the United States include national brands, such as Jeld-Wen, Simonton, Pella and Andersen, and numerous regional brands, including MI Home Products, Atrium, Weathershield and Milgard. Competitors in Canada include Jeld-Wen, All Weather, Loewen, and numerous regional brands. We generally

 

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compete on service, product performance, product offering, sales and support. We believe all of our products are competitively priced and that we are one of the only manufacturers to serve all end markets and price points.

Intellectual property

We possess a wide array of intellectual property rights, including patents, trademarks, tradenames, proprietary technology and know-how and other proprietary rights. In connection with the marketing of our products, we generally obtain trademark protection for our brand names in the Windows and Doors segment. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not become generic. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. While we do not believe the Windows and Doors segment is dependent on any one of our trademarks, we believe that our trademarks are important to the Windows and Doors segment and the development and conduct of our business as well as the marketing of our products. We vigorously protect all of our intellectual property rights.

Seasonality

Markets for our products are seasonal and can be affected by inclement weather conditions. Historically, our business has experienced increased sales in the second and third quarters of the year due to increased construction during those periods. Accordingly, our working capital is typically higher in the second and third quarters as well. Because much of our overhead and expense are fixed throughout the year, our operating profits tend to be lower in the first and fourth quarters. Inclement weather conditions can affect the timing of when our products are applied or installed, causing delayed profit margins when such conditions exist.

Because we have successfully implemented lean manufacturing techniques and many of our windows and doors are made to order, inventories in our Windows and Doors segment do not change significantly with seasonal demand.

Backlog

Our Windows and Doors segment had a backlog of approximately $33.6 million at March 30, 2013, $24.8 million at December 31, 2012 and $19.4 million at December 31, 2011. We filled 100% of the backlog at December 31, 2011 during 2012. We expect to fill 100% of the orders that were included in our backlog at December 31, 2012 and March 30, 2013.

Environmental and other regulatory matters

We are subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage and transport of hazardous materials, storage, treatment and disposal of waste, remediation of contaminated sites, and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. In addition, we have been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which we or our predecessors are alleged to have sent hazardous materials for recycling or disposal. We may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from

 

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current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of our properties from activities conducted by previous occupants. The amount of such liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.

We believe that we maintain all material permits required to operate our business and that our current operations are in substantial compliance with such permit terms, with the exception of the late filing on January 10, 2013 of the Title V semi-annual monitoring report for our Rocky Mount, Virginia facility air permit, for which we are currently investigating certain assumptions and calculations used in the permit development. Based on current information, we do not believe that any known compliance obligations, claims, releases or investigations will have a material adverse effect on our results of operations, cash flows or financial position. However, there can be no guarantee that previously known or newly-discovered matters or any inability to enforce our available indemnification rights against previous owners of our subsidiaries will not result in material costs or liabilities.

Under the stock purchase agreement governing the Ply Gem acquisition, our former parent, Nortek, has agreed to indemnify us, subject to certain limitations, for environmental liabilities arising from our former ownership or operation of subsidiaries or properties where such ownership or operation ceased prior to the completion of the Ply Gem acquisition and for certain other liabilities. Our ability to seek indemnification from Nortek is, however, limited by the strength of Nortek’s financial condition, which could change in the future, as well as by limits to any such indemnities or obligations. Nortek has also covenanted that after the Ply Gem acquisition, it will not dispose of all or substantially all of its property and assets in a single transaction or series of related transactions, unless the acquirer of either its residential building products segment or HVAC segment (whichever is sold first) assumes all of Nortek’s obligations (including Nortek’s indemnification obligations) under the stock purchase agreement.

We are currently involved in environmental proceedings involving Ply Gem Canada and Alberta Environment (arising from subsurface contamination discovered at our Calgary, Alberta property), and we may in the future be subject to environmental proceedings involving Thermal-Gard, Inc. (arising from groundwater contamination in Punxsutawney, Pennsylvania), Kroy Building Products, Inc. (relating to contamination in a drinking water well in York, Nebraska), and MHE (relating to a closed landfill site in Sidney, Ohio). Under the stock purchase agreement governing the Ply Gem acquisition, Nortek is to indemnify us fully for any liability in connection with the Punxsutawney contamination. Alcan Aluminum Corporation assumed the obligation to indemnify us with respect to certain liabilities for environmental contamination of the York property occurring prior to 1994 when it sold the property to us in 1998. Our former subsidiary, Hoover Treated Wood Products, Inc., is involved in an environmental proceeding with the Georgia Department of Natural Resources in connection with a contaminated landfill site in Thomson, Georgia. While we had assumed an obligation to indemnify the purchaser of our former subsidiary when we sold Hoover Treated Wood Products, Inc., our obligation has been novated and assumed by Nortek. Our ability to seek indemnification or enforce other obligations is, however, limited by the strength of the financial condition of the indemnitor or responsible party, which could change in the future, as well as by limits of any such indemnities or obligations.

 

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In 2011, MW, a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the EPA, Region III, under Section 3008(h) of the RCRA, primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. As part of the Administrative Order on Consent, MW provided the EPA with a facility investigation work plan and a preliminary cost estimate of approximately $1.8 million over the remediation period. This facility investigation work plan was approved by the EPA for initiation of remediation work in December 2012. Certain liabilities for this subject contamination have been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners. As the successor-in-interest of Fenway Partners, we are similarly indemnified by U.S. Industries, Inc. Our ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future.

In addition, under the stock purchase agreement governing the MWM Holding acquisition, the sellers agreed to indemnify us for the first $250,000 in certain costs of compliance with the New Jersey Industrial Site Recovery Act at a facility of MW in Hammonton, New Jersey and for 75% of any such costs between $250,000 and $5.5 million. Our ability to seek indemnification is, however, limited by the strength of the sellers’ financial condition, which could change in the future, as well as by limits to this indemnity.

We voluntarily comply with the Vinyl Siding Institute (“VSI”) Certification Program with respect to our vinyl siding and accessories. Under the VSI Certification Program, third party verification and certification, provided by Architectural Testing, Inc. (“ATI”), is used to ensure uniform compliance with the minimum standards set by the American Society for Testing and Materials (“ASTM”). Those products compliant with ASTM specifications for vinyl siding will perform satisfactorily in virtually any environment. Upon certification, products are added to the official VSI list of certified products and are eligible to bear the official VSI certification logo.

Employees

As of December 31, 2012, we had 4,992 full-time employees worldwide, of whom 4,605 were in the United States and 387 were in Canada. We consider our relations with our employees to be good. Employees at our Canadian plant and our Bryan, Texas plant are currently our only employees with whom we have a collective bargaining agreement.

 

 

Approximately 4.1% of our total employees are represented by the United Brotherhood of Carpenters and Joiners of America, pursuant to a collective bargaining agreement with certain of our Canadian employees, which expires on December 31, 2014.

 

 

Approximately 10.5% of our total employees are represented by the International Chemical Workers Union Council, pursuant to a collective bargaining agreement with certain of our Alenco Windows employees, which expires on December 4, 2013.

Financial information about geographic areas

All of the Company’s operations are located in the United States and Canada.

Revenue from external customers for the three months ended March 30, 2013 consisted of:

 

 

$240.6 million from United States customers

 

$15.7 million from Canadian customers

 

$0.8 million from all other foreign customers

 

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Revenue from external customers for the year ended December 31, 2012 consisted of:

 

 

$1,043.6 million from United States customers

 

$74.4 million from Canadian customers

 

$3.3 million from all other foreign customers

Revenue from external customers for the year ended December 31, 2011 consisted of:

 

 

$959.2 million from United States customers

 

$70.9 million from Canadian customers

 

$4.8 million from all other foreign customers

Revenue from external customers for the year ended December 31, 2010 consisted of:

 

 

$915.5 million from United States customers

 

$75.9 million from Canadian customers

 

$4.5 million from all other foreign customers

At March 30, 2013, December 31, 2012, 2011 and 2010, long-lived assets totaled approximately $16.6 million, $17.1 million, $17.1 million, and $18.0 million, respectively, in Canada, and $597.8 million, $601.7 million, $630.9 million and $667.5 million, respectively, in the United States. We are exposed to risks inherent in any foreign operation, including foreign exchange rate fluctuations.

Properties

Our corporate headquarters are located in Cary, North Carolina. We own and lease several additional properties in the United States and Canada. We operate the following facilities as indicated, and each facility is leased unless indicated with “Owned” under the Lease Expiration Date column below.

 

Location   Square Footage      Facility Use    Lease Expiration Date

 

 

 

 

    

 

  

 

Siding, Fencing and Stone Segment

       

Jasper, TN

    270,000       Manufacturing and Administration    Owned

Fair Bluff, NC(1)

    198,000       Manufacturing and Administration    9/30/2024

Kearney, MO(1)

    175,000       Manufacturing and Administration    9/30/2024

Kansas City, MO

    125,000       Warehouse    12/31/2013

Valencia, PA(2)

    104,000       Manufacturing and Administration    9/30/2024

Martinsburg, WV(1)

    163,000       Manufacturing and Administration    9/30/2024

Martinsburg, WV

    165,000       Warehouse    4/14/2016

York, NE(1)

    76,000       Manufacturing    9/30/2024

Stuarts Draft, VA

    257,000       Manufacturing and Administration    Owned

Sidney, OH

    819,000       Manufacturing and Administration    Owned

Gaffney, SC

    259,000       Manufacturing and Administration    Owned

Harrisonburg, VA

    358,000       Warehouse    2/28/2018

Kansas City, MO

    36,000       Administration    12/31/2017

Middleburg, PA

    100,000       Manufacturing and Administration    12/31/2016

South Pittsburgh, TN

    95,000       Warehouse    10/31/2014

Gaffney, SC

    55,000       Warehouse    12/31/2013

Selinsgrove, PA

    32,000       Warehouse    Month-to-month

 

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Location   Square Footage      Facility Use    Lease Expiration Date

 

 

 

 

    

 

  

 

Windows and Doors Segment

       

Calgary, AB, Canada(1)

    301,000       Manufacturing and Administration    9/30/2024

Walbridge, OH(1)

    250,000       Manufacturing and Administration    9/30/2024

Walbridge, OH

    20,000       Warehouse    5/30/2017

Rocky Mount, VA(1)

    600,000       Manufacturing and Administration    9/30/2024

Rocky Mount, VA

    163,000       Manufacturing    5/31/2013

Rocky Mount, VA

    180,000       Manufacturing    8/31/2016

Rocky Mount, VA

    70,000       Warehouse    2/16/2016

Rocky Mount, VA

    80,000       Warehouse    8/31/2013

Rocky Mount, VA

    120,000       Warehouse    8/31/2016

Rocky Mount, VA

    50,000       Warehouse    Month-to-month

Roanoke, VA

    13,000       Administration    Month-to-month

Fayetteville, NC

    56,000       Warehouse    Owned

Peachtree City, GA

    148,000       Manufacturing    8/19/2014

Peachtree City, GA

    40,000       Manufacturing    Owned

Dallas, TX(3)

    54,000       Manufacturing    8/31/2015

Dallas, TX(3)

    29,000       Warehouse    6/30/2015

Bryan, TX

    273,000       Manufacturing and Administration    8/20/2014

Bryan, TX

    75,000       Manufacturing    12/31/2014

Auburn, WA

    262,000       Manufacturing and Administration    10/31/2017

Corona, CA

    128,000       Manufacturing and Administration    12/30/2015

Sacramento, CA

    234,000       Manufacturing and Administration    9/12/2019

Tualatin, OR

    8,000       Warehouse    Month-to-month

Edmonton, AB, Canada

    29,000       Warehouse    4/30/2016

Red Deer, AB, Canada

    7,000       Warehouse    4/30/2016

Medicine Hat, AB, Canada

    9,000       Warehouse    12/31/2017

Regina, SK, Canada

    10,000       Warehouse    5/31/2015

Saskatoon, SK, Canada

    17,000       Warehouse    Owned

Grand Prairie, AB, Canada

    4,000       Warehouse    12/31/2013

Winnipeg, MB, Canada

    9,000       Warehouse    3/31/2014

Langley, BC, Canada

    9,000       Warehouse    2/28/2014

Calgary, AB, Canada

    351,000       Manufacturing and Administration    10/30/2022

Kelowna, BC, Canada

    15,000       Warehouse    6/30/2021

Prince George, BC, Canada

    7,000       Warehouse    5/31/2021

Vancouver, BC, Canada

    17,000       Warehouse    10/31/2016

Kamloops, BC, Canada

    1,000       Warehouse    10/31/2013

Edmonton, AB, Canada

    18,000       Warehouse    4/30/2018

Lethbridge, AB, Canada

    3,000       Warehouse    12/31/2013

Grand Prairie, SK, Canada

    3,000       Warehouse    Month-to-month

Saskatoon, SK, Canada

    6,000       Warehouse    3/31/2014

Winnipeg, MB, Canada

    9,000       Warehouse    12/31/2016

Corporate

       

Cary, NC

    20,000       Administration    10/31/2015

 

 

(1)   These properties are included in a long-term lease entered into as a result of a sale/leaseback agreement entered into in August 2004 as part of the funding for the purchase of MWM Holding.

 

(2)   This property was subleased to a third party during 2010.

 

(3)   The lease for these two properties was adjusted in 2013 to consolidate operations into one larger facility.

 

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Legal proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations and businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty, and modification, adjustment or replacement of component parts or units sold. The following is a general description of certain environmental and legal proceedings to which we and our subsidiaries are a party and certain related matters.

In 2011, MW, a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the EPA, Region III, under Section 3008(h) of the RCRA, primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. During 2011, as part of the Administrative Order on Consent, MW provided the EPA with a facility investigation work plan and a preliminary cost estimate of approximately $1.8 million over the remediation period, which is estimated through 2023. As a result, the Company incurred an incremental expense of approximately $1.6 million during the year and quarter ended December 31, 2011 to record an additional accrual for this preliminary cost estimate. This expense has been recognized within SG&A expenses for the year ended December 31, 2011 in the consolidated statement of operations. The Company has recorded approximately $0.3 million and $0.5 million of this environmental liability within current liabilities and approximately $1.5 million and $1.3 million within other long-term liabilities in the Company’s consolidated balance sheet at December 31, 2012 and December 31, 2011, respectively. The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.

Certain liabilities for this contamination were previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners. As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc. The Company’s ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future. As of December 31, 2012, no recovery has been recognized on the Company’s consolidated balance sheet but the Company will actively pursue the validity of this indemnity in future periods and will recognize future recoveries in the period in which they become probable.

In John Gulbankian and Robert D. Callahan v. MW Manufacturers, Inc., a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s V-Wood windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc., a purported class action filed in July 2012 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s Freedom and Freedom 800 windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive

 

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damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Anthony Pagliaroni v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by MHE. The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The damages sought in this action have not yet been quantified. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim. Deceuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify us for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. Our ability to seek indemnification from Deceuninck is, however, limited by the terms of the indemnity as well as the strength of Deceuninck’s financial condition, which could change in the future.

In The Muhler Company, Inc. v. Ply Gem Prime Holdings, Inc. et al., a lawsuit filed in April 2011 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff alleges unfair competition and trade practices. The plaintiff seeks a variety of relief, including (i) consequential damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. This action was dismissed by the Court in April 2013 after granting the Company’s motion for summary judgment with respect to the federal Lanham Act claims. The plaintiff filed a notice of appeal in May 2013. The damages sought in this action have not yet been quantified. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Karl Memari v. Ply Gem Prime Holdings, Inc. et al., a purported class action filed in March 2013 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the illegality and/or defects of MW’s vinyl clad windows. The plaintiff seeks a variety of relief, including (i) actual and compensatory damages, (ii) punitive damages, and (iii) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is at a preliminary stage, and the Company believes it has valid defenses to this claim and will vigorously defend this claim.

While the Company believes it has valid defenses to these claims and will vigorously defend, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.

 

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Management

Directors and executive officers

The following table sets forth information regarding our directors and executive officers as of the date of this prospectus.

 

Name    Age    Position(s)

 

Frederick J. Iseman

   60    Chairman of the Board and Director

Gary E. Robinette

   64    President, Chief Executive Officer, Vice Chairman of the Board and Director

Shawn K. Poe

   51    Vice President and Chief Financial Officer

John Wayne

   51    Executive Vice President, Chief Operating Officer

John Buckley

   48    President, Siding, Fencing and Stone

Lynn Morstad

   49    President, U.S. Windows and Doors

David N. Schmoll

   54    Senior Vice President, Human Resources

Timothy D. Johnson

   38    General Counsel

Robert A. Ferris

   70    Director

Steven M. Lefkowitz

   48    Director

John D. Roach

   69    Director

Michael Haley

   62    Director

Timothy T. Hall

   44    Director

Jeffrey T. Barber

   60    Director

 

Set forth below is a brief description of the business experience of each of the members of our board of directors and our executive officers.

Frederick J. Iseman - Chairman of the Board and Director

Since the Ply Gem acquisition, Frederick Iseman has served as our Chairman of the board of directors. Mr. Iseman is currently Chairman and CEO of CI Capital Partners, a private equity firm which was founded by Mr. Iseman in 1993. Prior to establishing CI Capital Partners, Mr. Iseman founded Hambro-Iseman Capital Partners, a merchant banking firm. From 1988 to 1990, Mr. Iseman was a member of the Hambro International Venture Fund. Mr. Iseman is a former Chairman of the Board of Anteon International Corporation and a former director of Buffets Holdings, Inc. Mr. Iseman graduated from Yale University with a BA in English Literature.

Mr. Iseman’s experience in the private equity field provides us with valuable insight regarding acquisitions, debt financings, equity financings and public market sentiment. In addition, Mr. Iseman’s experience with growing portfolio companies similar to the Company provides benchmarking and other industry tools pertinent to us. Mr. Iseman’s background and experiences qualify him to serve as Chairman of the Board.

Gary E. Robinette - President, Chief Executive Officer, Vice Chairman of the Board and Director

Gary E. Robinette was appointed our President and Chief Executive Officer in October 2006 at which time he was also elected to our board of directors. Mr. Robinette was elected Vice Chairman of the board of directors in May 2013. Prior to joining Ply Gem, Mr. Robinette served as Executive Vice President and COO at Stock Building Supply, formerly a Wolseley company, since

 

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September 1998, and was also a member of the Wolseley North American Management board of directors. Mr. Robinette held the position of President of Erb Lumber Inc., a Wolseley company, from 1993 to 1998 and served as Chief Financial Officer and Vice President of Carolina Holdings which was the predecessor company of Stock Building Supply. Mr. Robinette received a BS in accounting from Tiffin University and a MBA from Xavier University, where he is a member of the Board of Trustees. He is also a member of the Policy Advisory Board of Harvard University’s Joint Center for Housing Studies and serves on the board of directors for three companies sponsored by private equity firms.

Mr. Robinette’s 36 years of experience with building products and distribution companies provides the board with relevant industry knowledge and expertise pertinent to the current economic environment. Throughout Mr. Robinette’s tenure with various building product companies, he has experienced the housing industry’s thriving growth, as well as a number of recessionary declines in the market. These experiences provide the board with valuable insight regarding strategic decisions and the future direction and vision of the Company.

Shawn K. Poe - Vice President and Chief Financial Officer

Since the Ply Gem acquisition, Mr. Poe has served as our Vice President, Chief Financial Officer, Treasurer and Secretary. Mr. Poe was appointed Vice President of Finance of our siding and accessories subsidiaries in March 2000. Prior to joining the Company, Mr. Poe held the position of Corporate Controller and various other accounting positions at Nordyne, Inc., which he joined in 1990. In addition, Mr. Poe held various accounting positions with Federal Mogul Corporation from 1984 to 1990. Mr. Poe graduated from Southeast Missouri State University in 1984 with a BS in Accounting. Mr. Poe graduated from Fontbonne College in 1994 with an MBA.

John Wayne - Executive Vice President, Chief Operating Officer

Mr. Wayne was appointed Executive Vice President and Chief Operating Officer of the Company on June 1, 2012 after having served as President of our Siding, Fencing and Stone group subsidiaries since January of 2002. Mr. Wayne joined the Company in 1998, and prior to his appointment to President of our Siding, Fencing and Stone group had been Vice President of Sales and Marketing for our Variform and Napco siding and accessories subsidiaries. Prior to joining us, Mr. Wayne worked for Armstrong World Industries, Inc. from 1985 to 1998, holding a variety of sales management positions, including Vice President of Sales. Mr. Wayne served as the Chairman of the Vinyl Siding Institute, the Chairman of the VSI Code and Regulatory Committee, and Chairman of the VSI board of directors through December 2007 when his term ended. Mr. Wayne graduated from the University of Wisconsin in 1984 with a BBA in Finance and Marketing.

John Buckley - President, Siding, Fencing and Stone

Mr. Buckley was appointed President of our Siding, Fencing and Stone group effective June 1, 2012. Mr. Buckley joined the Company in 1999, and prior to his appointment to President of our Siding, Fencing and Stone group had been Senior Vice President of Sales for our Siding, Fencing and Stone group. Prior to joining us, Mr. Buckley worked for CertainTeed from 1991 to 1999, holding a variety of sales management positions, Mr. Buckley received a BA in communications from the University of Michigan in 1986, and a MSA from Madonna University in 1991.

 

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Lynn Morstad - President, U.S. Windows and Doors

Mr. Morstad was appointed President of our U.S. Windows and Doors group in October 2007 after having served as President of our New Construction Window Group since November 2006. Prior to that, Mr. Morstad served as President, Chief Operating Officer and Chief Financial Officer respectively of MW Manufacturers Inc., a Ply Gem subsidiary he joined in 2000. From March 1998 to May 2000, Mr. Morstad was employed by the Dr. Pepper/Seven Up division of Cadbury Schweppes as Vice President and Corporate Controller. In addition, Mr. Morstad served in senior financial positions, including Vice President Controller with various divisions of the Newell Company for more than eight years. Mr. Morstad is a graduate of the University of Iowa.

David N. Schmoll - Senior Vice President, Human Resources

Mr. Schmoll was appointed Senior Vice President of Human Resources in July 2007. Prior to joining Ply Gem, he served as Vice President of Stock Building Supply (formerly a Wolseley plc company) since 1995. Prior to that position, he served as Director of Human Resources since 1989 at Carolina Holdings, the predecessor company of Stock Building Supply, with responsibility for all human resource and development functions. Previously, Mr. Schmoll served in both human resource and collective bargaining positions at Reynolds & Reynolds. Mr. Schmoll graduated from the University of North Texas in 1981 and has attended executive development programs at both Duke University and the International Institute of Management Development.

Timothy D. Johnson - General Counsel

Mr. Johnson joined the Company in June 2008 as Senior Vice President and General Counsel. Prior to joining the Company, he served as Vice President and Regional Counsel at Arysta LifeScience North America from 2006 to 2008. Previously, Mr. Johnson was an attorney with the law firms of Hunton & Williams from 2003 to 2006 and Wilson Sonsini Goodrich & Rosati from 2001 to 2003. Mr. Johnson received a BA in biology from Taylor University in 1997, and a JD from Duke University School of Law in 2001.

Robert A. Ferris - Director

Since the Ply Gem acquisition, Robert A. Ferris has served as a director. Mr. Ferris retired as Managing Director of CI Capital Partners in December 2007, and was employed by CI Capital Partners since March 1998. From 1981 to February 1998, Mr. Ferris was a General Partner of Sequoia Associates (a private investment firm headquartered in Menlo Park, California). Prior to founding Sequoia Associates, Mr. Ferris was a Vice President of Arcata Corporation, a NYSE-listed company. Mr. Ferris is a former director of Anteon International Corporation, Buffets Holdings, Inc., Timberjack, Inc. and Champion Road Machinery Ltd. and is currently a director of A-T Solutions, Inc. Effective January 1, 2008, Mr. Ferris assumed the position of President of Celtic Capital LLC, the investment manager of the entities that primarily hold the assets and investments of the Ferris Family. Mr. Ferris attended Boston College and Fordham Law School.

Mr. Ferris’s prior tenure with CI Capital Partners as well as his public company experience as a director provides the board with extensive knowledge of the debt and equity markets and the effect that pending strategic decisions will have on these public markets. Mr. Ferris provides advice regarding the impact of certain strategic decisions on both the Company and our industry.

 

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Steven M. Lefkowitz - Director

Since the Ply Gem acquisition, Steven M. Lefkowitz has served as a director. Mr. Lefkowitz is President and Chief Operating Officer of CI Capital Partners, which he co-founded in 1993. From 1988 to 1993, Mr. Lefkowitz was employed by Mancuso & Company, a private investment firm, and served in several positions including as Vice President and as a Partner of Mancuso Equity Partners. Mr. Lefkowitz is a former director of Anteon International Corporation and Buffets Holdings, Inc. Mr. Lefkowitz graduated from Northwestern University and Kellogg Graduate School of Management.

Mr. Lefkowitz’s experience with private equity markets provides the board integral knowledge with respect to acquisitions, debt financings and equity financings.

John D. Roach - Director

Since the Ply Gem acquisition, Mr. Roach has served as a director. Mr. Roach is Chairman of the Board and Chief Executive Officer of Stonegate International, a private investment and advisory services company, and has been employed by Stonegate International since 2001. Mr. Roach served as Chairman of the Board, President and Chief Executive Officer of Builders FirstSource, Inc. from 1998 to 2001, and as Chairman of the Board, President and Chief Executive Officer of Fibreboard Corporation from 1991 to 1997. From 1987 to 1991, Mr. Roach held senior positions with Johns Manville Corporation, including President of Building Products Operations as well as Chief Financial Officer of Manville Corp., and served as a Senior Officer with Braxton Associates, Booz Allen Hamilton as well as The Boston Consulting Group. In addition, Mr. Roach currently serves as a director of URS Corporation, an engineering firm, a director of PMI Group, Inc., a provider of credit enhancement products and lender services, and a director of VeriSign, a leading provider of internet infrastructure services. Mr. Roach has previously served as a director of Kaiser Aluminum Corporation and its subsidiary, Kaiser Aluminum & Chemical Corporation and as a director of Material Sciences Corp., a provider of materials-based solutions, and participated on the boards of Magma Power, NCI Building Systems and Washington Group International. Mr. Roach holds a BS degree in Industrial Management from Massachusetts Institute of Technology and received an MBA degree from Stanford University Graduate School of Business, with highest distinction.

Mr. Roach’s industry experience has provided valuable insight to the board regarding strategic decisions. Mr. Roach understands the board’s impact in establishing corporate governance and evaluating strategic alternatives. Mr. Roach’s vast experience with multiple boards is valuable to the current board when establishing the future direction of the Company.

Michael Haley - Director

Mr. Haley has served as a director since January 2005. Mr. Haley joined MW Manufacturers Inc. in June 2001 as President and served in this capacity until being named Chairman in January 2005. Mr. Haley retired as Chairman of MW in June 2005. Prior to joining MW, Mr. Haley was the President of American of Martinsville (a subsidiary of La-Z-Boy Inc.) from 1994 until May 2001 and was President of Loewenstein Furniture Group from 1988 to 1994. From April 2006 to present, Mr. Haley has served as an advisor to Fenway Partners, a private equity firm. From 2008 to present, Mr. Haley has been a managing director of Fenway Resources, an affiliate of Fenway Partners. Mr. Haley was the executive chairman of Coach America from 2007 to 2010. In addition, Mr. Haley currently serves as a director of American National Bankshares, Inc., Stanley Furniture Company, Inc. and LifePoint Hospitals, Inc. Mr. Haley graduated from Roanoke College in 1973 with a Bachelor’s Degree in Business Administration.

 

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Mr. Haley’s industry experience and background with the Company provides the board with relevant industry knowledge and expertise when evaluating certain strategic decisions.

Timothy T. Hall - Director

In December 2006, the board of directors approved the addition of Mr. Hall as a member of the board. Mr. Hall is a Managing Director at CI Capital Partners and has been employed by CI Capital Partners since 2001. Prior to joining CI Capital Partners, Mr. Hall was a Vice President at FrontLine Capital and an Assistant Vice President at GE Equity. Mr. Hall has an MBA from Columbia Business School and a BS degree from Lehigh University.

Mr. Hall’s experience with private equity markets provides the board integral knowledge with respect to acquisitions, debt financings and equity financings.

Jeffrey T. Barber - Director

In January 2010, the board of directors approved the addition of Mr. Barber as a member of the board. Mr. Barber is a certified public accountant who worked for PricewaterhouseCoopers LLP from 1977 to 2008 and served as managing partner of PricewaterhouseCoopers’ Raleigh, North Carolina office for 14 years. Mr. Barber is currently a Managing Director with Fennebresque & Co., a Charlotte, North Carolina based investment banking firm. In addition, Mr. Barber currently serves on the board of Trustees of Blue Cross and Blue Shield of North Carolina and the board of directors of SciQuest, Inc., a procurement software company, where he serves as chair of the audit committee. Mr. Barber has a BS degree in accounting from the University of Kentucky.

Mr. Barber’s audit experience with PricewaterhouseCoopers LLP for 31 years in which he worked on initial public offerings, Sarbanes-Oxley 404 attestations, business acquisitions and debt financings provides the board with the financial background and experience to ensure the Company’s consolidated financial statements comply with financial reporting guidelines. These experiences qualify Mr. Barber as a financial expert allowing him to contribute financial reporting considerations when evaluating certain strategic decisions.

Controlled company

We intend to list the shares offered in this offering on the NYSE. For purposes of the NYSE rules, we expect to be a “controlled company.” “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group or another company. The CI Partnerships will continue to control more than 50% of the voting power of our common stock upon completion of this offering and are able to elect our entire board of directors. Accordingly, we are eligible to, and we intend to, take advantage of certain exemptions from NYSE governance requirements provided in the NYSE rules. Specifically, as a controlled company under NYSE rules, we are not required to have (1) a majority of independent directors, (2) a Nominating and Governance Committee composed entirely of independent directors or (3) a Compensation Committee composed entirely of independent directors. The “controlled company” exemption does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Sarbanes-Oxley Act and the NYSE rules, which require that our Audit Committee be composed of three independent directors.

 

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Board structure

Composition of our board of directors

Our board of directors currently consists of eight directors. Our amended and restated certificate of incorporation and amended and restated by-laws will provide that our board of directors will consist of no less than five nor more than 20 persons. The exact number of members of our board of directors will be determined from time to time by our board of directors. Upon consummation of this offering, our board will be divided into three classes as described below with the classes to be as nearly equal in number as possible. Commencing with the directors elected at the 2014 annual meeting of stockholders, each director will serve a three-year term with one class being elected at each year’s annual meeting of stockholders. Messrs. Ferris, Iseman and Roach will serve initially as Class I directors (with a term expiring in 2014). Messrs. Barber, Hall and Lefkowitz will serve initially as Class II directors (with a term expiring in 2015). Messrs. Haley and Robinette will serve initially as Class III directors (with a term expiring in 2016). Each of our directors and officers holds office until a successor is elected or qualified or until his earlier death, resignation, or removal. Vacancies and newly created directorships on the board of directors may be filled by the remaining directors.

Prior to the Triggering Event, our stockholders may remove directors with or without cause with the vote of at least a majority of the total voting power of our issued and outstanding capital stock entitled to vote in the election of directors. Following the Triggering Event, our stockholders may only remove directors for cause and with the vote of at least 75% of the total voting power of our issued and outstanding capital stock entitled to vote in the election of directors.

Under the amended and restated stockholders agreement to be entered into prior to the consummation of this offering, the CI Partnerships will be initially entitled to nominate a majority of the members of our board of directors and all of the parties to the stockholders agreement will agree to vote their shares of our common stock as directed by the CI Partnerships. The CI Partnerships will initially have the right to nominate six of our directors and the CI Partnerships’ initial board nominees are expected to be Messrs. Iseman, Lefkowitz, Hall, Ferris, Roach and Haley. See “Certain relationships and related party transactions—Stockholders agreement.”

Board leadership structure

Frederick J. Iseman serves as our Chairman and Gary E. Robinette serves as our President and CEO and also as Vice Chairman and a member of the board of directors. The board of directors has determined that this is an effective leadership structure at the present time because Mr. Iseman brings experience regarding acquisitions, debt financings, equity financings and public market sentiment while the board receives the benefit of Mr. Robinette’s intimate knowledge of the day-to-day operations of our business and his significant experience in the building products industry. A substantial majority of our equity is controlled by affiliates of CI Capital Partners LLC, including Frederick Iseman, and Messrs. Iseman, Lefkowitz and Hall (affiliates of CI Capital Partners, LLC) serve as our directors. Finally, the CI Partnerships will hold a majority of our common stock following this offering.

Committees of the board

Upon consummation of this offering, our board of directors will have three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Governance Committee.

 

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We will be required to have an Audit Committee comprised entirely of independent directors. As a controlled company, we are not required to have independent Nominating and Governance and Compensation Committees. Under the amended and restated stockholders agreement, the CI Partnerships will be initially entitled to nominate a majority of the members of our standing committees (other than our Audit Committee).

The following is a brief description of our committees:

Audit Committee.  Our Audit Committee recommends to the board of directors the appointment of our independent auditors, reviews and approves the scope of the annual audits of our financial statements, reviews our internal controls over financial reporting, reviews and approves any non-audit services performed by the independent auditors, reviews the findings and recommendations of the internal and independent auditors and periodically reviews major accounting policies.

The Audit Committee is currently comprised of Messrs. Barber, Hall, Roach and Haley, who are also expected to be the members of our Audit Committee upon completion of this offering. The board of directors has determined that Jeffrey Barber is qualified as the Audit Committee’s “financial expert” under the rules of the SEC implementing Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Barber serves as the Audit Committee chairman. Each of the members of the Audit Committee meets the independence and the experience requirements of the NYSE and the federal securities laws, except Mr. Hall does not meet the independence requirements of the NYSE and the federal securities laws.

Compensation Committee.  Our Compensation Committee reviews our compensation philosophy and strategy and considers the material risks that face us in evaluating compensation, administers incentive compensation and stock option plans, reviews the CEO’s performance and compensation, reviews recommendations on compensation of other executive officers and reviews other special compensation matters, such as executive employment agreements. The Compensation Committee is currently comprised of Messrs. Lefkowitz, Roach, Hall and Ferris, who are also expected to be the members of our Compensation Committee upon completion of this offering. Mr. Lefkowitz serves as the Compensation Committee chairman. The initial CI Partnerships designees on the Compensation Committee will be Messrs. Ferris, Hall and Lefkowitz.

Nominating and Governance Committee. Upon completion of this offering we will have a Nominating and Governance Committee. Subject to the rights of the CI Partnerships under the stockholders agreement, our Nominating and Governance Committee will select or recommend that the board select candidates for election to our board of directors and develop and recommend to the board of directors corporate governance guidelines that are applicable to us and oversee board of directors and management evaluations. Messrs. Iseman, Hall, Lefkowitz and Haley are expected to be the members of our Nominating and Governance Committee upon completion of this offering. Upon completion of this offering, Mr. Iseman will serve as the Nominating and Corporate Governance Committee chairman. The initial CI Partnerships designees on the Nominating and Governance Committee will be Messrs. Iseman, Hall and Lefkowitz.

Director independence

We have determined that Messrs. Barber, Ferris, Haley and Roach are independent as such term is defined by the applicable rules and regulations of the NYSE and the federal securities laws.

 

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Risk oversight

The board of directors has an oversight role, as a whole and also at the committee level, in overseeing management of our risks. The board of directors regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. The Compensation Committee of the board of directors is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the Audit Committee of the board of directors oversees the management of financial risks. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board of directors is regularly informed through committee reports about such risks.

Risk and compensation policies

Our management, at the direction of our board of directors, has reviewed our employee compensation policies, plans and practices to determine if they create incentives or encourage behavior that is reasonably likely to have a material adverse effect on the Company. In conducting this evaluation, management has reviewed our various compensation plans, including our incentive and bonus plans, equity award plans, and severance compensation, to evaluate risks and the internal controls we have implemented to manage those risks. In completing this evaluation, the board of directors and our management believe that there are no unmitigated risks created by our compensation policies, plans and practices that create incentives or encourage behavior that is reasonably likely to have a material adverse effect on us.

Code of ethics

We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and all other employees. This code of ethics is posted on our website at www.plygem.com. Any waiver or amendment to this code of ethics will be timely disclosed on our website. Copies of the code of ethics are available without charge by sending a written request to Shawn K. Poe at the following address: Ply Gem Holdings, Inc., 5020 Weston Parkway, Suite 400, Cary, North Carolina 27513.

 

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Executive compensation

Compensation discussion and analysis

Overview

This compensation discussion describes the material elements of compensation of the Company’s executive officers who served as named executive officers during our fiscal year ended December 31, 2012. The individuals who served as the principal executive officer and principal financial officer during 2012, as well as the other individuals included in the Summary Compensation Table below, are referred to as the “named executive officers.” This compensation discussion focuses primarily on compensation awarded to, earned by, or paid to the named executive officers in 2012, as reflected in the following tables and related footnotes and narratives, but also describes compensation actions taken before or after 2012 to the extent that it enhances an understanding of the executive compensation disclosure.

The principal elements of our executive compensation program are base salary, annual cash incentives, other personal benefits and perquisites, post-termination severance, equity-based interests, and a long-term incentive plan. Our other personal benefits and perquisites consist of life insurance benefits and car allowances. The named executive officers are also eligible to participate in our 401(k) plan and our company-wide employee benefit health and welfare programs.

Unless otherwise stated, this compensation discussion does not give effect to the Reorganization Transactions or this offering.

Compensation program objectives and philosophy

General Philosophy

Our compensation philosophy is designed to provide a total compensation package to our executive officers that is competitive within the building materials industry and enables us to attract, retain, and motivate the appropriate talent for long-term success. In determining whether the components of our compensation packages, including salary and target bonus percentages, are competitive within the industry, we conduct informal, internal reviews of other building material companies that file public reports with the SEC to obtain a general understanding of such companies’ compensation practices. During the year ended December 31, 2010, the Compensation Committee retained a compensation consultant to evaluate the total compensation packages for our executive officers. As a result of this compensation consultant’s analysis, the Chief Executive Officer’s and the Chief Financial Officer’s base salaries were adjusted to market rates effective January 2011. We did not utilize the services of a compensation consultant for the years ended December 31, 2012 or 2011. We may continue to utilize a compensation consultant in future periods as necessary. The compensation consultant that was retained in 2010 did not perform any other services for the Company.

We believe that total compensation should be reflective of individual performance, which we evaluate based on the executive’s achievement of individual performance targets, such as increasing operational efficiencies and successfully meeting budget, product development and customer focused initiatives, but should also vary with our performance in achieving financial and non-financial objectives, thus rewarding the attainment of these objectives. We align compensation levels commensurate with responsibilities and experience of the respective executive officers. We balance these compensation levels with our risk management policies to

 

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mitigate any conflicts of interest. We also weight executive officers’ base salaries, incentive amounts, and equity awards in a manner intended to minimize risk-taking incentives that could have a detrimental effect on us.

The components of total compensation for our executive officers are as follows:

 

 

Base salary

In general. We provide the opportunity for our named executive officers and other executives to earn a competitive annual base salary. We provide this opportunity to attract and retain an appropriate caliber of talent for these positions and to provide a base wage that is not subject to our performance risk, as are other elements of our compensation, such as the annual cash incentive awards, equity interests, and long-term incentive awards described below. Base salaries of our named executive officers are only one component of our named executive officers’ compensation packages and will not substitute for our incentive awards.

Our President and Chief Executive Officer, Gary E. Robinette, reviews the base salaries for our named executive officers, other than the President and Chief Executive Officer, in November and December of each year with any recommended increases being based on our performance as well as the individual’s performance and responsibilities, which we believe to be consistent with our overall philosophy of rewarding both strong individual and Company performance. After this review, any salary increases for the executive officers other than the President and Chief Executive Officer are recommended by our President and Chief Executive Officer to our Compensation Committee and board of directors for approval. The base salary for our President and Chief Executive Officer is determined by the Compensation Committee of our board of directors, but will not be less than $530,000 per year.

 

 

Annual cash incentive awards

In general.  We provide the opportunity for our named executive officers to earn an annual cash incentive award based upon our performance as well as the executive’s individual performance. We provide this opportunity to attract and retain an appropriate caliber of talent for these positions and to motivate executives to achieve our financial goals. We believe that providing these annual incentives is consistent with our objective of providing compensation that varies with our performance in achieving financial and non-financial objectives.

2012 target award opportunities.  Our 2012 performance measure was based upon the Company meeting or exceeding the following targets:

(i) Adjusted EBITDA targets (70% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment and 80% of total bonus for Corporate) – For purposes of measuring annual cash incentives, we defined “adjusted EBITDA” as net income (loss) plus interest expense (net of interest income), provision (benefit) for income taxes, depreciation and amortization, non-cash loss (gain) on modification or extinguishment of debt, non-cash foreign currency gain/(loss), restructuring and integration costs, customer inventory buybacks, impairment charges and management fees paid under our advisory agreement with an affiliate of the CI Partnerships. We established adjusted EBITDA targets for each of our respective segments and corporate office personnel with a minimum level of adjusted EBITDA required before any target award is achieved. The target adjusted EBITDA for Siding, Fencing and Stone, Windows and Doors and Corporate was approximately $123.6 million, $21.6 million and $129.0 million, respectively, while actual 2012 performance for Siding, Fencing and Stone, Windows and Doors and Corporate was approximately 110%, 56% and 93% of the respective targets, resulting in the achievement of 150%, 48% and 93%, respectively, of the applicable

 

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component of each executive’s target bonus. A portion of every dollar of incremental consolidated adjusted EBITDA above the minimum threshold level went to fund the bonus pool. The actual 2012 cash award achieved as a percentage of the targeted cash award for each segment performance and for corporate performance is detailed in the table below and was determined based on actual “adjusted EBITDA” performance relative to the bonus plan parameters.

(ii) Market share (10% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment) – The market share growth criteria were measured based upon relative market share holdings compared from 2011 to 2012 for the respective segments. The target market share gains for Siding, Fencing and Stone and Windows and Doors were approximately $14.0 million and $31.8 million, respectively, while actual 2012 performance for Siding, Fencing and Stone and Windows and Doors was approximately 175% and 100% of the respective targets, resulting in the achievement of 100% and 50%, respectively, of the applicable component of each executive’s target bonus. The actual 2012 award achieved as a percentage of the target for each segment performance is detailed in the table below and was determined based on actual market share gains achieved relative to the bonus plan parameters.

(iii) Working capital (10% of total bonus for Siding, Fencing and Stone segment and Windows and Doors segment) – The working capital criteria were measured based upon comparative year-over-year period working capital performance by segment. We defined working capital as accounts receivable plus inventory less accounts payable. The target working capital for Siding, Fencing and Stone and Windows and Doors was approximately $236.4 million and $246.4 million, respectively, while actual 2012 performance for Siding, Fencing and Stone and Windows and Doors was approximately 125% and 100% of the respective targets, resulting in the achievement of 138% and 125%, respectively, of the applicable component of each executive’s target bonus. The actual 2012 award achieved as a percentage of the target for each segment performance is detailed in the table below and was determined based on actual working capital achieved relative to the bonus plan parameters.

(iv) Innovation (10% of total bonus for Siding, Fencing and Stone segment, Windows and Doors segment, and Corporate) – The innovation criteria were achieved if the Company effectively pursued new product opportunities or new operating processes or procedures based on a ratings scale designed to measure creative thinking. Based on a review of the innovation achievements of new product development and process improvements, all groups were able to achieve the 100% threshold for 2012. The actual 2012 award achieved as a percentage of the target for each segment performance and for corporate performance is detailed in the table below and was determined based on level of innovation achieved relative to the bonus plan parameters.

 

      Percentage of
Target Bonus
(EBITDA)

(i)
     Percentage of
Target Bonus
(Market share)
(ii)
     Percentage of
Target Bonus
(Working capital)
(iii)
     Percentage of
Target Bonus
(Innovation)
(iv)
 

Siding, Fencing and Stone

     150%         100%         138%         100%   

Windows and Doors

     48%         50%         125%         100%   

Unallocated/Corporate

     93%         NA         NA         100%   

(v) Expense reduction (10% of total bonus for Corporate) – The expense reduction criteria were achieved if corporate expenditures were less than budgeted corporate expenditures of approximately $19.9 million. Corporate achieved an award of 143.6% of target for the year ended December 31, 2012 by reducing corporate expenditures by approximately $0.5 million.

 

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Depending upon each named executive officer’s responsibilities, a target award opportunity was established as a percentage of the individual officer’s base salary at a range from 75% to 100% of base salary. The target cash incentive opportunity percentage of base salary for each individual officer is established based upon the position within the Company and is comparable to like positions within our Company. Prior to the beginning of the year, Mr. Robinette reviewed our annual cash incentive plans, the performance measures and resulting awards with our Compensation Committee and our board of directors. For the year ended December 31, 2012, annual target cash incentive opportunities for the named executive officers were 100% of base salary for Mr. Robinette and 75% of base salary for Messrs. Poe, Wayne, Buckley, and Morstad. Based on the 2012 incentives above, the named executive officers earned bonuses of $693,000, $259,875, $520,125, $286,647, and $168,659 for Mr. Robinette, Mr. Poe, Mr. Wayne, Mr. Buckley, and Mr. Morstad, respectively.

 

 

Perquisites and other personal benefits

In general.  We provide the opportunity for our named executive officers to receive certain perquisites and other personal benefits, including car allowances and Company-paid life insurance premiums. We provide these benefits as an additional useful benefit for our executives, and we believe that providing these benefits is essential to our ability to remain competitive in the general marketplace for attracting and retaining executive talent. For the year ended December 31, 2012, we provided personal benefits and perquisites, including car allowances and Company-paid life insurance premiums, to all of our named executive officers, as described below in the “—Summary compensation table.”

 

 

Equity awards

In general.  Historically, we have provided the opportunity for our named executive officers to purchase both shares of common stock, par value $.01 per share (“Ply Gem Prime Common Stock”) and senior preferred stock, par value $.01 per share (“Ply Gem Prime Senior Preferred Stock”) in Ply Gem Prime, which was our parent company prior to the Reorganization Transactions.

We believe that it is vital to our Company to provide our named executive officers with the opportunity to hold an equity interest in our business. We believe that equity ownership among executives aligns management’s interests with those of stockholders and provides long-term incentives for the executives. Our named executive officers have a significant impact on the long-term performance of the Company, so this opportunity is intended to motivate them to improve the overall value of the business. Providing a Ply Gem Prime Senior Preferred Stock component as well as a Ply Gem Prime Common Stock component has allowed the executives to hold an ownership interest that has mirrored that held by non-employee investors in our Company and motivated and rewarded the executives for achieving financial objectives. We also believe that our management equity ownership structure promotes the retention of key management and that providing an equity component of compensation is consistent with our compensation objectives of rewarding executives through performance-based compensation and attracting and retaining an appropriate caliber of talent.

The opportunities that we give our executive officers to invest in the business have been event-driven and have not been provided on any annual or other regular basis. The number of shares that a named executive officer has been permitted to purchase is determined based upon the individual’s level of responsibility within the Company. All equity purchases have been reviewed and approved by our Compensation Committee and board of directors.

 

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Ply Gem Prime Common Stock.  Some of our named executive officers have purchased Ply Gem Prime Common Stock either as (1) “Incentive Stock” or (2) part of a strip of equity that is purchased at the same time as the officer purchases shares of Ply Gem Prime Senior Preferred Stock.

Incentive stock—Protected and unprotected.  Ply Gem Prime Common Stock purchased as Incentive Stock becomes “Protected” over time, based on the officer’s continued service with the Company. Twenty percent (20%) of each officer’s Incentive Stock becomes Protected on the first anniversary of the purchase date and on each of the next four anniversaries. If the officer’s employment with us terminates at any time, no remaining Incentive Stock that is not Protected (“Unprotected”) will become Protected. In addition, if a realization event or an initial public offering occurs at any time, any Incentive Stock that is Unprotected becomes immediately fully Protected. Upon the closing of this offering, all Incentive Stock will become Protected.

Incentive stock—Termination of employment.  If a named executive officer’s Incentive Stock becomes Protected, the officer may have the opportunity to receive a greater per-share price for such stock if the stock is purchased by Ply Gem Prime. Specifically, if the named executive officer’s employment with us is terminated for reasons other than cause, then Ply Gem Prime has the right to purchase the officer’s shares of Protected Incentive Stock at a price per share (the “Protected Stock Purchase Price”) equal to the quotient obtained by dividing (x) the excess of (i) a multiple of consolidated EBITDA over (ii) consolidated indebtedness, less the amount of unrestricted cash of Ply Gem Prime and its consolidated subsidiaries as of the date of termination by (y) the number of shares of fully diluted Ply Gem Prime Common Stock on the date of the officer’s termination of employment. For any Incentive Stock that is Unprotected as of termination, the purchase price per share (the “Unprotected Stock Purchase Price”) is the lesser of (a) the original purchase price paid by the officer for the Incentive Stock, plus or minus any change in adjusted retained earnings per share from the date the shares were originally purchased through the end of the most recent fiscal quarter preceding the date of termination of employment and (b) the Protected Stock Purchase Price. If the officer is terminated for cause, all Incentive Stock held by the officer, whether or not Protected, will be repurchased by Ply Gem Prime at the Unprotected Stock Purchase Price.

We believe that this schedule whereby Incentive Stock becomes Protected over time aids in our ability to retain our named executive officers by requiring the executives’ continued service with the Company. In addition, because this schedule provides that the officers’ Incentive Stock becomes Protected upon certain corporate transactions, this schedule will provide the officers the incentive to work toward achieving such a transaction and to share in the value received by other shareholders.

If Ply Gem Prime Common Stock is not designated as Incentive Stock and is purchased as part of a strip with Ply Gem Prime Senior Preferred Stock, then the Ply Gem Prime Common Stock is fully vested at the time of purchase. This Ply Gem Prime Common Stock may be repurchased by Ply Gem Prime at any time following the officer’s termination of employment for the Protected Stock Purchase Price described above.

Upon the closing of this offering, Ply Gem Prime’s right to repurchase Incentive Stock and common stock in connection with the termination of an officer’s employment will expire.

Ply Gem Prime Senior Preferred Stock.  Ply Gem Prime Senior Preferred Stock that is purchased by the officers is fully vested at the time of purchase. This Ply Gem Prime Senior Preferred Stock may be repurchased by Ply Gem Prime at any time following the officer’s termination of employment

 

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and before the closing of this offering for a price that takes into account the liquidation value and the maximum dividend on the shares of Ply Gem Prime Senior Preferred Stock, consistent with the Certificate of Incorporation of Ply Gem Prime.

Phantom common and preferred stock units.  Upon the completion of the Ply Gem acquisition and the MWM Holding acquisition, certain members of management contributed their investment in predecessor companies in exchange for phantom common stock units and phantom preferred stock units which were governed by a phantom stock plan. Under the phantom stock plan, each participant’s interest in the plan was recorded in a bookkeeping account; however, no stock was initially issued under the phantom stock plan. Each account recorded a number of units so that, any “phantom common stock units” were deemed invested in Ply Gem Prime Common Stock and any “phantom preferred stock units” were deemed invested in Ply Gem Prime Senior Preferred Stock. Certain of the phantom common stock units became “Protected” according to the same schedule as the Incentive Stock, based on the date the units were first awarded to the officers. Other phantom common stock units were not subject to any such schedule. Under the plan, upon liquidation and payment of a participant’s account, the value of the account generally was to be paid to the participant either in cash or in shares of Ply Gem Prime’s stock having a fair market value equal to the account balance, in the discretion of Ply Gem Prime. The opportunity for any named executive officer to participate in the phantom stock plan, as well as their level of participation, was reviewed and approved by our board of directors.

For the first three quarters of 2006, the phantom units were recognized by us as liability awards that had to be marked to market every quarter. In addition, in 2004, 2005 and 2006, new tax rules governing nonqualified deferred compensation required a re-examination of the structure of the phantom stock plan. Because of the risk of volatility associated with the above accounting treatment and the complexity associated with tax and accounting rule changes, our board of directors determined that the cost associated with the administrative, accounting and tax work for the phantom stock units was excessive and outweighed the benefits of continuing to permit the officers to hold such units.

As such, in September 2006, we converted all phantom common and preferred stock units held by each named executive officer into a cash account payable on a fixed schedule in years 2007 and beyond. The value of the portion of each cash account that represented phantom common stock units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00. From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest were credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans. This portion of the account was paid to each officer in a single lump-sum cash payment on January 31, 2007. The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of Ply Gem Prime Senior Preferred Stock represented by such units. This portion of the account was credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment. This portion of the account was paid on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, was paid on each such date, or, if earlier, the officer’s death, disability or a change of control. During the years ended December 31, 2012, 2011 and 2010, Mr. Morstad received phantom stock payouts of $0, $216,630, and $262,583, respectively.

 

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In connection with the conversion described above, the board of directors authorized Ply Gem Prime to allow the named executive officers to invest in Ply Gem Prime Common Stock on September 25, 2006, which stock was either Incentive Stock or not, in the same proportion that the officer’s phantom units had been deemed invested in such stock.

Stock options. We may grant the named executive officers options to purchase shares of Ply Gem Prime Common Stock pursuant to the Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. Options granted pursuant to the 2004 Option Plan have historically been intended to qualify as incentive stock options under the Code. In November 2011, we granted Mr. Robinette an option to purchase 150,000 shares of a new non-voting class of our common stock at an exercise price of $100. These stock options were not intended to qualify as incentive stock options. Our Compensation Committee determined that the November 2011 option grant was necessary for retention purposes and to keep Mr. Robinette aligned with shareholders to an extent commensurate with the number of shares repurchased by Ply Gem Prime in 2011. (See “—Compensation discussion and analysis—Employment agreements and retention agreements—CEO retention agreement” for additional discussion). The stock options granted to the chief executive officer vest 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015. In connection with the Reorganization Transactions, options to purchase shares of common stock of Ply Gem Prime will be converted into options to purchase shares of our common stock with adjustments to the number of shares and the per share exercise prices to reflect the merger.

Long term incentive plan

During the year ended December 31, 2011, the Company finalized the LTIP, a long term incentive plan, for certain employees including our named executive officers. During the year ended December 31, 2012, another LTIP grant was provided to certain executive officers. The long-term incentive plan was implemented to retain the named executive officers through the downturn in the housing market and ensure consistency with the executive team. The target bonus percentages were established at the following levels based on external compensation analyses performed for named executive officers considering their roles and responsibilities:

 

     

Long-term incentive plan

Target bonus percentage

of base salary

 

 

 

Mr. Robinette

     300%   

Mr. Poe

     150%   

Mr. Wayne

     150%   

Mr. Buckley

     150%   

Mr. Morstad

     150%   

 

 

The long-term incentive plan has two separate components:

Performance bonus (50% of long-term incentive bonus) – The performance bonus component vests over a two-year period, with the first potential payment in January 2013 based on the initial 2011 grant. The performance bonus can be paid in either cash or stock. A participant in the plan is required to be an employee at the time of the payment in order to receive the award. For 2011 and 2012 grants, the performance criterion is 90% of targeted EBITDA for the following combined two fiscal years (2012 and 2013 for 2012 grants). For the years ended December 31, 2012 and 2011, the performance bonus portion of the LTIP was not achieved.

 

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Restricted stock (50% of long-term incentive bonus) – The restricted stock component vests over a three year period with the first vesting date in January 2014 since the plan was incepted in 2011. The participants in the plan are required to be an employee at the time of the payment in order to receive the award. In 2014 and 2015, an appropriate number of shares of restricted stock or common stock will be provided to eligible participants, including named executive officers, equating to the 50% restricted stock component based on the fair value of the stock.

Employment agreements and retention agreements

President and Chief Executive Officer

CEO employment agreement

In October 2006, Mr. Robinette joined the Company and was appointed as our President and Chief Executive Officer. In connection with such appointment, Mr. Robinette entered into an employment agreement with us, pursuant to which we have agreed to pay him an annual base salary of not less than $530,000 and an annual cash incentive target of 100% of base salary. In addition, Mr. Robinette was provided the opportunity by our Compensation Committee and board of directors to purchase 125,660 shares of Ply Gem Prime Common Stock, at a price of $10.00 per share, 110,000 shares of which were shares of Incentive Stock. The previous employment agreement expired during 2011 and a new employment agreement was finalized between the Company and the President and Chief Executive Officer during November 2011, which extended the term of his agreement by three years.

CEO retention agreement

During November 2011, the Company finalized a retention agreement with Mr. Robinette for his continued services through December 31, 2014 at which point Mr. Robinette would be entitled to receive a one-time, lump-sum cash bonus of $2,000,000. The board of directors determined the bonus to be a reasonable and necessary amount to retain Mr. Robinette’s services and remain competitive in the marketplace for executive talent. We provided this retention opportunity to Mr. Robinette because we believe that Mr. Robinette’s experience and talent are necessary to guide us through the depressed residential housing and repair and remodeling markets.

CEO IPO bonus agreement

In May 2013, in consideration of Mr. Robinette’s efforts towards the successful completion of this offering, and in lieu of any benefits that he would have received under the tax receivable agreement but for the repurchase of his shares by Ply Gem Prime as described below under “Certain relationships and related party transactions—Other transactions,” our Compensation Committee determined it to be in the Company’s best interests to award Mr. Robinette the opportunity to earn a one-time cash bonus equal to $1.5 million upon the successful completion of this offering on or prior to December 31, 2013, subject to his continued employment with the Company through such date. Such bonus, if earned, will be paid in a lump sum upon the successful completion of this offering.

Chief Financial Officer

During November 2011, the Company finalized a new retention agreement with Mr. Poe for his continued services through December 31, 2014, at which point Mr. Poe would be entitled to receive a one-time, lump-sum cash bonus of $700,000. The board of directors determined the bonus to be a reasonable and necessary amount to retain Mr. Poe’s services and remain

 

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competitive in the marketplace for executive talent. We provided this retention opportunity to Mr. Poe because his prior retention arrangement was paid out and we believe that Mr. Poe’s experience and talent remain necessary to guide us through the depressed residential housing and repair and remodeling markets.

Post-Termination severance

We provide the opportunity for certain of our named executive officers to be protected under the severance provisions contained within their retention agreements and, for Mr. Robinette, his employment agreement, by providing salary continuation if employment is terminated under certain circumstances (two years for Mr. Robinette and one year for our other named executive officers). If the payment of severance to Mr. Robinette causes him to become subject to the golden parachute excise tax rules under Section 280G and 4999 of the Code, then we will pay him a gross-up amount so that after all taxes are paid on the gross-up, he will have enough funds remaining to pay the excise tax imposed on the severance payments. We provide this opportunity to attract and retain an appropriate caliber of talent for the position. These retention agreements and Mr. Robinette’s employment and retention agreements were approved by our Compensation Committee and board of directors, and the terms of these agreements can be found in individual agreements that have been filed as exhibits to the registration statement of which this prospectus forms a part. We believe that the terms of our retention agreements and of Mr. Robinette’s employment agreement and amended retention agreement are consistent with the provisions and benefit levels of other companies based upon reviewing disclosures made by those companies with the SEC in order to obtain a general understanding of current compensation practices. We believe that the arrangements and benefits opportunity contained within our retention agreements and Mr. Robinette’s employment agreement are reasonable and allow us to remain competitive in the general marketplace for executive talent. These arrangements are described in detail in “—Termination or change in control arrangements for 2012” below. The employment agreement between Mr. Robinette and the Company establishes the terms of his employment including salary and benefits, annual cash incentive award target and severance provisions in the event of a termination of Mr. Robinette’s employment.

The following table shows information concerning the annual compensation during 2012 for services provided to us by our President and Chief Executive Officer, our Vice President and Chief Financial Officer and our three other most highly compensated executive officers.

 

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Summary compensation table

 

Name and Principal Position   Year     Salary
($)
    Bonus ($)    

Stock

Awards
(2)

    Option
Awards
($)(3)
   

Non-equity

Incentive Plan
Compensation
($)(4)

    Change in
Pension
Value(5)
    All Other
Compensation
($)(6)
    Total ($)  

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gary E. Robinette

    2012      $ 700,000      $      $ 1,050,000      $      $ 693,000      $      $ 30,046      $ 2,473,046   

President & Chief Executive Officer

   
 
2011
2010
  
  
   
 
700,000
580,000
  
  
   
 
3,000,000
  
  
   
 
1,050,000
  
  
   
 
5,261,100
298,272
  
  
   
 
70,000
  
  
   

 


  

  

   
 
35,527
27,066
  
  
   
 
10,116,627
905,338
  
  

Shawn K. Poe

    2012        350,000               262,500               259,875               31,474        903,849   

Vice President & Chief Financial Officer

    2011        350,000        650,000        262,500               26,250               33,354        1,322,104   
    2010        300,000                      248,560                      26,864        575,424   

John Wayne

    2012        458,580               301,574        200,560        520,125               151,913        1,632,752   

Executive Vice President & Chief Operating Officer

    2011        394,165               291,375               216,752               31,642        933,934   
    2010        388,500                             19,425               25,687        433,612   

John Buckley

    2012        282,032 (1)             83,948        320,896        286,647               30,357        1,003,880   

President, Siding, Fencing and Stone

    2011                                                           
    2010                                                           

Lynn Morstad

    2012        383,000               287,250               168,659        12,500        30,271        881,680   

President, Windows & Doors

    2011        375,417               277,500               28,725        15,017        32,276        728,935   
    2010        370,000                                    9,879        25,649        405,528   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   In connection with Mr. Wayne’s appointment as Executive Vice President and Chief Operating Officer, his annual base salary was increased to $500,000. In connection with Mr. Buckley’s appointment as President, Siding, Fencing and Stone, his annual base salary was increased to $320,000. The amount in this table reflects the actual base salaries paid to them during the year.

 

(2)   The amounts in this column represent the aggregate grant date fair value, computed in accordance with FASB ASC Topic 718, of the restricted stock portion of the long-term incentive plan 2011 and 2012 grants. At the end of the vesting period, restricted stock will be provided equating to the fixed dollar value of the grant varying by the then determined fair value of the restricted stock. This long term incentive plan is described in the “General Philosophy” section above.

 

(3)   For the years ended December 31, 2012, 2011, and 2010, the amounts in this column represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718 made during each respective year. Refer to Note 11 to the consolidated financial statements for a discussion of the assumptions made in the valuation.

 

(4)   The amounts in this column represent performance-based cash bonuses earned for services rendered during 2012, 2011 and 2010. These incentive bonuses are described in the “Compensation discussion and analysis—Annual cash incentive awards” section above.

 

(5)   None of the named executive officers, other than Lynn Morstad, is covered by either of the Company’s pension plans. For Mr. Morstad, the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2012 increased by $9,552 and $2,948, respectively. For Mr. Morstad, the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2011 increased by $10,544 and $4,473, respectively, and the aggregate actuarial present value of his pension benefit under the MW Manufacturing Inc. Retirement Plan and SERP plan for 2010 increased by $6,930 and $2,949, respectively. The named executive officers did not receive any above-market or preferential earnings on compensation deferred on a basis that is not tax-qualified.

 

(6)   The amounts in this column with respect to 2012 consist of the following items for each named executive officer shown below:

 

  (1)   Gary E. Robinette: $18,480 car allowance, $4,066 insurance premiums, and $7,500 company 401(k) contributions.

 

  (2)   Shawn K. Poe: $14,400 car allowance, $9,574 insurance premiums, and $7,500 company 401(k) contributions.

 

  (3)   John Wayne: $15,450 car allowance, $9,648 insurance premiums, $8,530 company 401(k) contributions, and $118,285 in relocation reimbursement.

 

  (4)   John Buckley: $13,650 car allowance, $9,391 insurance premiums, and $7,316 company 401(k) contributions.

 

  (5)   Lynn Morstad: $14,400 car allowance, $9,621 insurance premiums, and $6,250 company 401(k) contributions.

 

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Grants of plan-based awards for 2012

 

Name   Award   Grant Date  

Estimated Future
Payouts Under Non-

equity Incentive Plan
Awards(1)

    All Other
Stock
Awards(2)
    Option
Awards:
Number of
Securities
Underlying
Options
(#)(3)
    Exercise
Price of
Option
Awards
($/Sh)
    Grant
Date Fair
Value of
Stock and
Option
Awards
(3)
 
      Target     Maximum          

 

 

Gary E. Robinette

  Long-term incentive plan   January 1, 2012   $ 1,050,000      $      $ 1,050,000             $      $   
  Annual incentive plan   N/A     700,000        1,050,000                               

Shawn K. Poe

  Long-term incentive plan   January 1, 2012     262,500               262,500                        
  Annual incentive plan   N/A     262,500        393,750                               

John Wayne

  Stock Options   December 11, 2012                          5,000        100        200,560   
  Long-term incentive plan   January 1, 2012     301,574               301,574                        
  Annual incentive plan   N/A     375,000        562,500                               

John Buckley

  Stock Options   December 11, 2012                          8,000        100        320,896   
  Long-term incentive plan   January 1, 2012     83,948               83,948                        
  Annual incentive plan   N/A     240,000        360,000                               

Lynn Morstad

  Long-term incentive plan   January 1, 2012     287,250               287,250                        
  Annual incentive plan   N/A     287,250        430,875                               

 

 

 

(1)   These amounts represent the target payout amounts for the performance portion of the long-term incentive plan awards and the target and maximum payouts for the incentive plan granted to each named executive officer in 2012.

 

(2)   These amounts represent the restricted stock portion of the long-term incentive plan grant for each named executive officer when the stock vests after three years. The dollar amount of the payout is fixed at grant and will be paid in three years in a variable amount of restricted stock or Common Stock for this service component of the long-term incentive plan.

 

(3)   These amounts represent stock options granted to each of the named executive officers during 2012, computed in accordance with FASB ASC Topic 718. Refer to Note 11 to the consolidated financial statements for a discussion of the assumptions made in the valuation.

Outstanding equity awards at fiscal year-end for 2012

The following table reflects the outstanding equity awards at fiscal year end for 2012, without giving effect to the Reorganization Transactions:

 

Name  

Number of

securities

underlying

unexercised

options

(#) exercisable(1)

   

Number of

securities

underlying

unexercised

options

(#) unexercisable

(1)

   

Option

exercise

price ($)

   

Option

expiration

date

 

Number of

shares or units

of stock that

have not

vested (#)(2)

   

Market value

of shares or

units of stock

that have

not vested

($)(3)

 

Gary E. Robinette

   
 
 
3,934
4,800
37,500
  
  
  
   

 

 

984

7,200

112,500

  

  

  

  $

$

$

80

80

100

  

  

  

 

October 2, 2018

April 28, 2020

November 11, 2021

   

 

 

21,000

  

  

  

  $

 

 

2,100,000

  

  

  

Shawn K. Poe

   
 
1,202
4,000
  
  
   

 

301

6,000

  

  

  $

$

80

80

  

  

 

October 2, 2018

April 28, 2020

   
 
5,250
  
  
   

 

525,000

  

  

John Wayne

   

 

 

2,573

12,000

  

  

  

   

 

 

643

3,000

5,000

  

  

  

  $

$

$

80

80

100

  

  

  

 

October 2, 2018

December 5, 2018

December 11, 2022

   

 

 

5,929

  

  

  

   

 

 

592,949

  

  

  

John Buckley

   

 

 

1,600

1,500

  

  

  

   
 
 
400
1,000
8,000
  
  
  
  $

$

$

80

80

100

  

  

  

 

October 2, 2018

December 14, 2019

December 11, 2022

   

 

 

1,658

  

  

  

   

 

 

165,848

  

  

  

Lynn Morstad

   

 

3,090

9,600

  

  

   

 

773

2,400

  

  

  $

$

80

80

  

  

 

October 2, 2018

December 5, 2018

   

 

5,648

  

  

   

 

564,750

  

  

 

 

 

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The following table reflects the outstanding equity awards at fiscal year end for 2012 on a pro forma basis after giving effect to the Reorganization Transactions:

 

Name   

Number of

securities

underlying

unexercised

options

(#) exercisable(1)

  

Number of

securities

underlying

unexercised

options

(#) unexercisable

(1)

  

Option

exercise

price ($)

  

Option

expiration

date

  

Number of

shares or

units of

stock that

have not

vested (#)

(2)

  

Market value

of shares or

units of stock

that have

not vested ($)(3)

Gary E. Robinette

         $                          $                            

Shawn K. Poe

                 

John Wayne

                 

John Buckley

                 

Lynn Morstad

                 

 

 

(1)   Each option becomes vested and exercisable with respect to 20% of the shares covered by the option on each of the first five anniversaries of the grant date, excluding Mr. Robinette’s November 2011 grant, which vests 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015.

 

(2)   The stock awards set forth in this table represent restricted stock awards described in the long-term incentive plan section above. The actual number of shares eligible to vest in 2014 and 2015 will be a number with an aggregate fair market value equal to the fixed dollar amount in the column to the immediate right, and the share numbers in this column were calculated by dividing that fixed number by $100, an estimate of the fair market value of one share of our common stock as of December 31, 2012.

 

(3)   The market value represents the fixed liability related to the long-term incentive plan to be settled in January 2014 and January 2015 with a variable amount of restricted stock or common stock based on the fair value of the stock at that time.

Pension benefits for 2012

 

Name(a)   

Plan name

(b)

    

Number of years

credited service

(#)(c)

   

Present value

of accumulated

benefit ($)

(d)(1)

    

Payments during

last fiscal year

($)(e)

 

 

 

Gary E. Robinette

     NA              $       $                       —   

Shawn K. Poe

     NA                          

John Wayne

     NA                          

John Buckley

     NA                          

Lynn Morstad

     MW Retirement Plan         4 (2)      55,403           
     MW SERP Plan         4 (2)      22,397           

 

 

 

(1)   The material assumptions used to derive the present value of the accumulated pension benefit shown in this table are set forth in Note 5 “Defined Benefit Plans” to our audited consolidated financial statements included elsewhere in this prospectus.

 

(2)   The number in this column is less than the number of the officer’s actual years of service with the Company. This is because the plans have been frozen, as described below.

Pension plans

We maintain the MW Manufacturers, Inc. Retirement Plan, a tax-qualified defined benefit retirement plan, acquired with the MWM Holding acquisition in August 2004 (the “MW Retirement Plan”) and the MW Manufacturers, Inc. Supplemental Executive Retirement Plan (the “MW SERP Plan”), which covers our executives whose benefits are limited by operation of the Code. We refer to both the MW Retirement Plan and the MW SERP Plan together as the “MW Plans.” Mr. Morstad is a participant in the MW Plans. None of the other named executive officers is a participant in our pension plans.

 

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The MW Plans’ benefits are calculated based upon years of service with the Company and compensation levels during the service period. Participation under the MW Plans was frozen with respect to all salaried employees effective October 31, 2004. The decision to freeze the benefit provisions affects any executive officer under the MW Plans.

The normal retirement date to receive full benefits is the first calendar month following the participant’s 65th birthday. There are provisions under the MW Plans for a reduced benefit amount upon election of early retirement prior to age 65, with this option available to all participants of the MW Plans, including executive officers.

The benefit payment options under the MW Plans are as follows:

 

 

Life annuity;

 

 

Period certain annuities;

 

 

Joint and survivor annuity (if married); and

 

 

In some cases under the MW Retirement Plan only, a full or partial lump sum payment.

Termination or change in control arrangements for 2012

Each of the named executive officers is entitled to certain payments and benefits in the event that his employment is terminated by the Company without “cause” or he resigns following a “material adverse change.” The following chart quantifies these payments and benefits:

 

Name    Years     

Severance

($)(1)

    

Benefits

($)

    

Bonus

($)(2)

    

Total

($)

 

 

 

Employment Agreement:

              

Gary E. Robinette

     2       $ 1,400,000       $ 4,066       $ 700,000       $ 2,104,066   

Retention Agreements:

              

Shawn K. Poe

     1         350,000         9,574         262,500         622,074   

John Wayne

     1         500,000         9,648         375,000         884,648   

John Buckley

     1         320,000         9,391         240,000         569,391   

Lynn Morstad

     1         383,000         9,621         287,250         679,871   

 

 

 

(1)   As described in the narrative below, the severance arrangement is payable over a two-year salary continuation period for Mr. Robinette and a one-year salary continuation period for the other named executive officers.

 

(2)   A portion of the performance measures for the year ended December 31, 2012 was achieved. As a result, the amounts in this column represent the target amounts for the annual management incentive plan bonuses.

Mr. Robinette’s employment agreement and the retention agreements for each of Messrs. Wayne, Poe, Buckley, and Morstad provide that the officer will receive payments and benefits if he is terminated without “cause” or resigns following a “material adverse change.” “Cause” means certain failures to perform duties after demand by the board of directors or obey the board of directors or a senior executive of the Company, a material act of dishonesty in connection with executive duties, or conviction of a felony, a fraudulent or dishonest misdemeanor or a civil judgment for fraud.

“Material adverse change” is defined in Mr. Robinette’s employment agreement as an assignment of duties inconsistent with his position, reduction of salary or target bonus or Company action that would deny him any material employee benefit without his consent. “Material adverse change” in the retention agreements for the other named executive officers is

 

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defined the same as in Mr. Robinette’s employment agreement; however, it does not include a reduction in target bonus, but does include a requirement that the executive be based more than 50 miles from his current office location, as well as any Company breach of any provision of the retention agreement.

To receive any payments or benefits in connection with a termination for cause or material adverse change, the executive must release certain claims against the Company. In addition, the executive must comply with certain restrictive covenants, including a covenant not to compete with our business for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives. The restrictive covenants also prohibit the executives from soliciting our employees for two years following termination in the case of Mr. Robinette and one year following termination in the case of all other executives. The covenants also prohibit disclosure of our confidential information and the mailing of disparaging statements about the Company and our people.

Mr. Robinette’s current employment agreement provides that he will receive an amount equal to two years of his base salary at the time of termination, plus medical insurance benefit coverage paid over the 24 months following termination. If Mr. Robinette dies or becomes disabled prior to December 31, 2014, he will be paid a pro rata portion of the $2,000,000 retention payment described above under “—Compensation discussion and analysis—Employment agreements and retention agreements—President and Chief Executive Officer.”

For the named executive officers other than Mr. Robinette, if the named executive officer’s employment is terminated during the year, the officer is eligible to receive an amount equal to one year of base salary at the rate at the time of termination, paid over a one-year period, plus a pro rata portion of an amount equal to the lesser of the officer’s annual cash incentive award target or the actual cash incentive award that would have been paid under the incentive award plan had the officer been employed at the date that such cash incentive award is actually paid, paid in a lump sum as soon as practicable following the date on which the amount is determined. The named executive officers other than Mr. Robinette are also eligible to receive a lump sum payment equal to a pro rata portion of any annual cash bonus the officer would have received with respect to the year of termination, paid when bonuses are paid to other executives, as well as continuation of medical and dental benefits for one year following termination of employment.

Mr. Poe may be eligible to receive severance in addition to that shown in the table above worth up to one additional year if at the end of the 12 month period following his termination he has not been able to obtain employment providing him with a salary of at least $300,000. If Mr. Poe dies or becomes disabled prior to December 31, 2014, he will be paid a pro rata portion of the $700,000 retention payment described above under “—Compensation discussion and analysis— Employment agreements and retention agreements—Chief Financial Officer retention agreement and payment.”

The named executive officers may be entitled to receive a cash payment for their individual shares of Incentive Stock, if Ply Gem Prime elects to exercise its call right under the existing stockholders agreement. If Ply Gem Prime had exercised its call right on December 31, 2012, the named executive officers would not have received any money for any of the shares of common stock because the value per share at December 31, 2012 per the formula and terms contained in the existing stockholders agreement was zero. Upon closing of this offering, Ply Gem Prime’s call right will expire.

 

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In addition, upon a change in control, all Ply Gem Prime Common Stock held by the named executive officers that is Unprotected will become Protected. Vesting of Ply Gem Prime Common Stock accelerates upon a change of control transaction or an initial public offering but only to the extent of the proportion of our business that is sold or offered to the public.

Long term incentive plan

As described above in “—Compensation discussion and analysis—Compensation program objectives and philosophy—General Philosophy—Long term incentive plan,” during the year ended December 31, 2011, the Company finalized a LTIP for certain employees. The purpose of our LTIP is to give us a competitive edge in attracting, retaining and motivating employees, directors and consultants and to provide us with a stock plan providing incentives directly related to increases in our stockholder value.

Terms of the plan

Administration.  Our Compensation Committee will administer our LTIP. The Compensation Committee will have the authority to determine the terms and conditions of any agreements evidencing any awards granted under our LTIP, and to adopt, alter and repeal rules, guidelines and practices relating to our LTIP. Our Compensation Committee will have full discretion to administer and interpret the LTIP, to adopt such rules, regulations and procedures as it deems necessary or advisable and to determine among other things the time or times at which the awards may be exercised, and whether and under what circumstances an award may be exercised.

Eligibility.  Any of our employees, directors, officers or consultants or advisors, or of our subsidiaries or their respective affiliates, will be eligible for awards under our LTIP. Our Compensation Committee has the sole and complete authority to determine who will be granted an award under the LTIP.

Number of shares authorized.  The LTIP provides for an aggregate of                  shares of our common stock to be available for awards. No more than                  shares of common stock may issued in respect of incentive stock options under our LTIP. No participant may be granted awards of options and stock appreciation rights with respect to more than                  shares of common stock in any one year. No more than                  shares of common stock may be granted to any participant, or the fair market value of                  shares for awards paid in cash, under our LTIP with respect to performance compensation awards denominated in shares in any one year. The maximum amount that can be paid to any participant in a given year pursuant to a performance compensation award denominated in cash is                 . If any award is forfeited, or if any option terminates, expires or lapses without being exercised, shares of our common stock subject to such award will again be available for future grant. If there is any change in our corporate capitalization, the Compensation Committee in its sole discretion may make substitutions or adjustments to the number of shares reserved for issuance under our LTIP, the number of shares covered by awards then outstanding under our LTIP, the limitations on awards under our LTIP, the exercise price of outstanding options and such other equitable substitution or adjustments as it may determine appropriate.

The LTIP will have a term of ten years, and no further awards may be granted after the expiration of the term.

 

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Awards available for grant.  The Compensation Committee may grant awards of nonqualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, restricted stock units, stock bonus awards, performance compensation awards or any combination of the foregoing.

Options.  The Compensation Committee is authorized to grant options to purchase shares of common stock that are either “qualified,” meaning they satisfy the requirements of Section 422 of the Code for incentive stock options, or “nonqualified,” meaning they are not intended to satisfy the requirements of Section 422 of the Code. These options will be subject to the terms and conditions established by the Compensation Committee. Under the terms of our LTIP, unless the Compensation Committee determines otherwise, the exercise price of the options will not be less than the fair market value of our common stock at the time of grant (or not less than 110% of the fair market value of our common stock on the date of grant in the case of a qualified option granted to a 10% Stockholder). Options granted under the LTIP will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by our Compensation Committee and specified in the applicable award agreement. The maximum term of an option granted under the LTIP will be ten years from the date of grant (or five years in the case of a qualified option granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in cash, check, or cash equivalent, by surrender of unrestricted shares (at their fair market value on the date of exercise) which have been held by the participant for at least six months, have been purchased on the open market, or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to be made through a broker-assisted cashless exercise mechanism or by such other method as our Compensation Committee may determine to be appropriate.

Stock appreciation rights.  Our Compensation Committee is authorized to award stock appreciation rights (referred to in this prospectus as “SARs”) under the LTIP. SARs will be subject to the terms and conditions established by the Compensation Committee. A SAR is a contractual right that allows a participant to receive, in the form of cash, shares or any combination of cash and shares, the appreciation, if any, in the value of a share over a certain period of time. An option granted under the LTIP may include SARs, and our Compensation Committee may also award SARs to a participant independent of the grant of an option. SARs granted in connection with an option shall be subject to terms similar to the option corresponding to such SARs. The terms of the SARs shall be subject to terms established by the Compensation Committee and reflected in the award agreement.

Restricted stock.  Our Compensation Committee is authorized to award restricted stock under the LTIP. Awards of restricted stock will be subject to the terms and conditions established by the Compensation Committee. Restricted stock is common stock that generally is non-transferable and is subject to other restrictions determined by the Compensation Committee for a specified period. Unless the Compensation Committee determines otherwise, or specifies otherwise in an award agreement, if the participant terminates employment during the restricted period, then any unvested restricted stock is forfeited.

Restricted stock unit awards.  Our Compensation Committee is authorized to award restricted stock units. Restricted stock unit awards will be subject to the terms and conditions established by the Compensation Committee. Unless the Compensation Committee determines otherwise, or specifies otherwise in an award agreement, if the participant terminates employment or services during the period of time over which all or a portion of the units is to be earned, then any unvested units will be forfeited. At the election of the Compensation Committee, the participant

 

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will receive a number of shares of common stock equal to the number of units earned or an amount in cash equal to the fair market value of that number of shares, at the expiration of the period over which the units are to be earned, or at a later date selected by the Compensation Committee.

Stock bonus awards.  Our Compensation Committee is authorized to grant awards of unrestricted shares, either alone or in tandem with other awards, under such terms and conditions as the Compensation Committee may determine.

Performance compensation awards.  The Compensation Committee may grant any award under the LTIP in the form of a performance compensation award by conditioning the vesting of the award on the satisfaction of certain performance goals. The committee may establish these performance goals with reference to one or more of the following:

 

 

net earnings or net income (before or after taxes);

 

 

basic or diluted earnings per share (before or after taxes);

 

 

net revenue or net revenue growth;

 

 

gross revenue or gross revenue growth;

 

 

gross profit or gross profit growth;

 

 

net operating profit (before or after taxes);

 

 

return measures (including, but not limited to, return on assets, capital, gross revenue or gross revenue growth, invested capital, equity or sales);

 

 

cash flow (including, but not limited to, operating cash flow, free cash flow and cash flow return on capital);

 

 

earnings before or after taxes, interest, depreciation and/or amortization;

 

 

gross or net operating margins;

 

 

productivity ratios;

 

 

share price (including, but not limited to, growth measures and total stockholder return);

 

 

expense targets or cost reduction goal, general and administrative expense savings;

 

 

margins;

 

 

operating efficiency;

 

 

objective measures of customer satisfaction;

 

 

working capital targets;

 

 

measures of economic value added or other “value creation” metrics;

 

 

inventory control;

 

 

enterprise value;

 

 

sales;

 

 

stockholder return;

 

 

client retention;

 

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competitive market metrics;

 

 

employee retention;

 

 

timely completion of new product rollouts;

 

 

timely launch of new facilities;

 

 

objective measures of personal targets, goals or completion of projects (including but not limited to succession and hiring projects, completion of specific acquisitions, reorganizations or other corporate transactions or capital-raising transactions, expansions of specific business operations and meeting divisional or project budgets);

 

 

system-wide revenues;

 

 

royalty income;

 

 

cost of capital, debt leverage year-end cash position or book value;

 

 

strategic objectives, development of new product lines and related revenue, sales and margin targets, or international operations; or

 

 

any combination of the foregoing.

Transferability.  Each award may be exercised during the participant’s lifetime only by the participant or, if permissible under applicable law, by the participant’s guardian or legal representative, and may not be otherwise transferred or encumbered by a participant other than by will or by the laws of descent and distribution.

Amendment.  The LTIP has a term of 10 years. Our board of directors may amend, suspend or terminate our LTIP at any time; however, stockholder approval may be necessary if the law so requires. No amendment, suspension or termination will impair the rights of any participant or recipient of any award without the consent of the participant or recipient.

Change in control.  In the event of a change in control (as defined in the LTIP), the board of directors, in its sole discretion, may provide that all outstanding options and equity (other than performance compensation awards) issued under the LTIP will vest fully and performance compensation awards will vest, as determined by the Compensation Committee, based on the level of attainment of the specified performance goals. The Compensation Committee may, in its discretion, cancel outstanding awards and pay the value of the awards to the participants in connection with a change in control.

Material U.S. federal income tax consequences

The following is a general summary of the material U.S. federal income tax consequences of the grant, exercise and vesting of awards under our plans and the disposition of shares acquired pursuant to the exercise of such awards and is intended to reflect the current provisions of the Code and the regulations thereunder. This summary is not intended to be a complete statement of applicable law, nor does it address foreign, state, local and payroll tax considerations. Moreover, the U.S. federal income tax consequences to any particular participant may differ from those described herein by reason of, among other things, the particular circumstances of such participant.

Options—Qualified and nonqualified.  The Code requires that, for favorable tax treatment of a qualified option (“incentive stock options”), shares of our common stock acquired through the exercise of a qualified option cannot be disposed of on or before the later of (i) two years from

 

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the date of grant of the option and (ii) one year from the date of exercise. Holders of qualified options will generally incur no federal income tax liability at the time of grant or upon exercise of those options. However, the spread at exercise will be an “item of tax preference,” which may give rise to “alternative minimum tax” liability for the taxable year in which the exercise occurs. If the holder does not dispose of the shares on or before two years following the date of grant and one year following the date of exercise, the difference between the exercise price and the amount realized upon disposition of the shares will constitute long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowed to us for federal income tax purposes in connection with the grant or exercise of the qualified option. If, within two years following the date of grant or within one year following the date of exercise, the holder of shares acquired through the exercise of a qualified option disposes of those shares, the participant will generally realize taxable compensation at the time of such disposition equal to the difference between the exercise price and the lesser of the fair market value of the shares on the date of exercise or the amount realized on the subsequent disposition of the shares, and that amount will generally be deductible by us for federal income tax purposes, subject to the possible limitations on deductibility under Sections 280G and 162(m) of the Code for compensation paid to executives designated in those Sections. Finally, if an otherwise qualified option becomes first exercisable in any one year for shares having an aggregate value in excess of $100,000 (based on the grant date value), the portion of the qualified option in respect of those excess shares will be treated as a non-qualified stock option for federal income tax purposes. No income will be realized by a participant upon grant of any stock option. Upon the exercise of a non-qualified stock option, the participant will recognize ordinary compensation income in an amount equal to the excess, if any, of the fair market value of the underlying exercised shares over the option exercise price paid at the time of exercise. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under Sections 280G and 162(m) of the Code for compensation paid to certain executives designated in those Sections.

Restricted stock.  A participant will not be subject to tax upon the grant of an award of restricted stock unless the participant otherwise elects to be taxed at the time of grant pursuant to Section 83(b) of the Code. On the date an award of restricted stock becomes transferable or is no longer subject to a substantial risk of forfeiture, the participant will have taxable compensation equal to the difference between the fair market value of the shares on that date over the amount the participant paid for such shares, if any, unless the participant made an election under Section 83(b) of the Code to be taxed at the time of grant. If the participant made an election under Section 83(b), the participant will have taxable compensation at the time of grant equal to the difference between the fair market value of the shares on the date of grant over the amount the participant paid for such shares, if any. (Special rules apply to the receipt and disposition of restricted shares received by officers and directors who are subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). We will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income tax purposes, but such deduction may be limited under Sections 280G and 162(m) of the Code for compensation paid to certain executives designated in those Sections.

Restricted stock units.  A participant will not be subject to tax upon the grant of a restricted stock unit award. Rather, upon the delivery of shares or cash pursuant to a restricted stock unit award, the participant will have taxable compensation equal to the fair market value of the number of shares (or the amount of cash) he actually receives with respect to the award. We will be able to deduct the amount of taxable compensation to the participant for U.S. federal income tax purposes, but the deduction may be limited under Sections 280G and 162(m) of the Code for compensation paid to certain executives designated in those Sections.

 

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SARs.  No income will be realized by a participant upon grant of a SAR. Upon the exercise of a SAR, the participant will recognize ordinary compensation income in an amount equal to the fair market value of the payment received in respect of the SAR. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under Sections 280G and 162(m) of the Code for compensation paid to certain executives designated in those Sections.

Stock bonus awards.  A participant will have taxable compensation equal to the difference between the fair market value of the shares on the date the award is made over the amount the participant paid for such shares, if any. We will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income tax purposes, but such deduction may be limited under Sections 280G and 162(m) of the Code for compensation paid to certain executives designated in those Sections.

Section 162(m).  In general, Section 162(m) of the Code denies a publicly held corporation a deduction for U.S. federal income tax purposes for compensation in excess of $1,000,000 per year per person to its chief executive officer and the four other officers whose compensation is required by the Exchange Act to be disclosed in its proxy statement, subject to certain exceptions. The LTIP is intended to satisfy either an exception or applicable transitional rule requirements with respect to grants of options to covered employees. In addition, the LTIP is designed to permit certain awards of restricted stock, restricted stock units and other awards to be awarded as performance compensation awards intended to qualify under either the “performance-based compensation” exception to Section 162(m) of the Code or applicable transitional rule requirements.

Director compensation for 2012

 

Name   

Fees earned or

paid in cash 
($)

     Stock
awards
($)(1)
    

Option

awards

($)(2)

    

All other

compensation

($)(1)

     Total ($)  

 

 

Frederick Iseman

   $       $       $         —       $                 —       $   

Robert A. Ferris

                                       

Steven M. Lefkowitz

                                       

John D. Roach

     77,500         63,000                         140,500   

Michael Haley

     75,000         63,000                         138,000   

Jeffrey T. Barber

     80,000         63,000                         143,000   

Timothy T. Hall

                                       

 

 

 

(1)   The amounts in this column represent the aggregate grant date fair value of $60,000 for each of the three awards issued in January 2012 to Directors as well as the portion of the December 2012 $60,000 issued to each director that was earned by the end of 2012.

 

(2)   As of December 31, 2012, Mr. Roach, Mr. Haley, and Mr. Barber had 3,500, 3,500, and 2,500 stock options outstanding, respectively.

The Director fees consist of annual amounts for participation on the board of directors as well as participation on the compensation Committee, the Audit Committee, and the Nominating and Governance Committee for certain directors.

During January 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three members of the board of directors (Mr. Roach, Mr. Haley, and Mr. Barber). These shares became fully vested during 2012.

 

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During December 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three members of the board of directors (Mr. Roach, Mr. Haley, and Mr. Barber). These shares will vest over the 2012 through 2013 twelve month period.

Compensation committee interlocks and insider participation

During 2012, our Compensation Committee consisted of: Messrs. Steven M. Lefkowitz (chairman), John D. Roach, Timothy T. Hall, and Robert A. Ferris. None of these directors has ever served as an officer or employee of the Company. During 2012, none of the members of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. None of our executive officers served as a member of the board of directors or compensation committee, or similar committee, of any other company whose executive officer(s) served as a member of our board of directors or our Compensation Committee.

 

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Principal stockholders

The table below sets forth, as of May 5, 2013, information with respect to the beneficial ownership of our common stock by:

 

 

each of our directors and each of the executive officers named in the Summary Compensation Table under “Executive compensation;”

 

 

each person who is known to be the beneficial owner of more than 5% of any class or series of our capital stock; and

 

 

all of our directors and executive officers as a group.

The amounts and percentages of common stock outstanding and percentage of beneficial ownership before this offering are based on the number of shares of common stock to be issued and outstanding prior to this offering after giving effect to the Reorganization Transactions.

The amounts and percentages of common stock beneficially owned are reported on the basis of the regulations of the SEC governing the determination of beneficial ownership of securities. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

 

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Name and address of
beneficial owner(1)
   Shares of common stock
and percentage of class
beneficially owned before
this offering
     Shares of common stock
and percentage of class
beneficially owned after
this offering assuming
no exercise of
over-allotment option
  

Percentage of class

beneficially

owned assuming

full exercise of

over-allotment

option

   Number    Percentage      Number    Percentage   

5% Stockholders

              

Caxton-Iseman (Ply Gem), L.P.(2)(3)(4)

        19.4%            

Caxton-Iseman (Ply Gem) II, L.P.(2)(3)(4)

        70.0%            

Directors and Named Executive Officers

              

Frederick J. Iseman(2)(3)(5)

        89.4%            

Robert A. Ferris

        *                

Steven M. Lefkowitz(2)(3)(6)

        89.4%            

Gary E. Robinette(7)

        *                

Shawn K. Poe(8)

        1.0%            

John Wayne(9)

        1.1%            

John Buckley(10)

        *                

Lynn Morstad(11)

        1.3%            

John D. Roach(12)

        *                

Michael Haley(13)

        *                

Jeffrey Barber

        *                

Timothy Hall

        *                

All Directors and Executive Officers as a Group (14 persons)(14)

          93.5%                  

 

 *    Less than 1%

 

(1)   Unless otherwise indicated, the address of each person listed in this table is c/o Ply Gem Holdings, Inc., 5020 Weston Parkway, Suite 400, Cary, North Carolina, 27513.

 

(2)   Under the terms of the amended and restated stockholders agreement to be entered into prior to the consummation of this offering, each of our stockholders prior to this offering (including certain of the directors and executive officers named in the above tables) will agree to vote their shares of common stock as directed by the CI Partnerships. As a result, the CI Partnerships and Messrs. Iseman and Lefkowitz may be deemed to beneficially own         % of our common stock after the consummation of this offering (        % if the underwriters exercise their over-allotment option in full). The CI Partnerships and Messrs. Iseman and Lefkowitz disclaim beneficial ownership of any shares of common stock held by the other parties to the stockholders agreement. See “Certain relationships and related party transactions—Stockholders agreement.”

 

(3)   Address is c/o CI Capital Partners LLC, 500 Park Avenue, New York, New York 10022.

 

(4)   Rajaconda Holdings, Inc. is the general partner of each of the CI Partnerships and is deemed to beneficially own the shares held by the CI Partnerships.

 

(5)   By virtue of his indirect control of the CI Partnerships, Mr. Iseman shares voting and investment power over the shares of our common stock held by the CI Partnerships and is deemed to beneficially own the shares of common stock held by those entities. Mr. Iseman disclaims beneficial ownership of the shares beneficially owned by the CI Partnerships except to the extent of his pecuniary interest therein.

 

(6)   By virtue of being a director of Rajaconda Holdings, Inc., Mr. Lefkowitz shares voting and investment power over the shares of our common stock held by the CI Partnerships and is deemed to beneficially own the shares of common stock held by the CI Partnerships. Mr. Lefkowitz disclaims beneficial ownership of the shares beneficially owned by the CI Partnerships except to the extent of his pecuniary interest therein.

 

(7)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(8)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

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(9)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(10)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(11)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(12)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(13)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

(14)   Includes options to purchase                 shares of common stock that are vested and exercisable or will become vested and exercisable within 60 days.

 

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Certain relationships and related party transactions

Reorganization transactions

In connection with this offering, we will merge with our parent corporation and engage in a series of transactions that will convert the outstanding subordinated debt, common stock and preferred stock of our parent corporation into common equity and result in a single class of our common stock outstanding.

Currently, Ply Gem Prime owns 100% of our capital stock. As of March 30, 2013, Ply Gem Prime had three classes of preferred stock, three classes of common stock and approximately $68.4 million aggregate principal amount of its 10% Senior Subordinated Notes due 2015 (the “Prime Notes”) outstanding. The Prime Notes are held by the CI Partnerships and all of the preferred stock and common stock of Ply Gem Prime is held by the CI Partnerships and certain current and former directors and members of our management team or their related parties. Prior to the closing of this offering, the CI Partnerships will exchange the Prime Notes held by them for a new class of senior preferred stock of Ply Gem Prime (the “New Preferred Stock”) with a liquidation preference equal to the principal amount of and accrued interest on the Prime Notes.

Immediately prior to the closing of this offering, Ply Gem Prime will merge with and into Ply Gem Holdings, with Ply Gem Holdings being the surviving entity. In the reorganization merger, we will issue a total of                  shares of our common stock, representing          % of our outstanding common stock after giving effect to this offering (or         % if the underwriters exercise their over-allotment option in full). In the reorganization merger, all of the preferred stock (including New Preferred Stock) of Ply Gem Prime (including the subordinated debt of Ply Gem Prime that will have been converted into preferred stock as part of the Reorganization Transactions) will be converted into a number of shares of our common stock based on the initial public offering price of our common stock and the liquidation value of and the maximum dividend amount in respect of the preferred stock. The holders of common stock of Ply Gem Prime will receive an aggregate number of shares of our common stock equal to the difference between                 and the number of shares of our common stock issued to the holders of preferred stock of Ply Gem Prime. The initial public offering price of our common stock will be determined by a negotiation between us and the Representatives, as further described in “Underwriting.”

Based on an assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), in the reorganization merger, holders of preferred stock of Ply Gem Prime (including the New Preferred Stock) will receive an aggregate of                  shares of our common stock and holders of common stock of Ply Gem Prime will receive an aggregate of                  shares of our common stock. In addition, in connection with the Reorganization Transactions, options to purchase shares of common stock of Ply Gem Prime will be converted into options to purchase shares of our common stock with adjustments to the number of shares and per share exercise prices to reflect the reorganization merger.

 

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The table below sets forth the consideration to be received by our directors, executive officers and our principal stockholders in connection with the Reorganization Transactions, based on an assumed public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus):

 

Name   

Common stock to be issued in

reorganization transactions

 

Caxton-Iseman (Ply Gem), L.P. 

  

Caxton-Iseman (Ply Gem) II, L.P. 

  

Frederick J. Iseman

  

Gary E. Robinette

  

Shawn K. Poe

  

John Wayne

  

John Buckley

  

Lynn Morstad

  

Timothy D. Johnson

  

David N. Schmoll

  

Robert A. Ferris

  

Steven M. Lefkowitz

  

John D. Roach

  

Michael Haley

  

Timothy T. Hall

  

Jeffrey T. Barber

  

 

Stockholders agreement

Ply Gem Prime is currently party to an amended and restated stockholders agreement (the “Existing Stockholders Agreement”) with the CI Partnerships and certain of our current and former members of management and their related parties. The Existing Stockholders Agreement contains provisions related to the composition of Ply Gem Prime’s board of directors, voting agreements, rights of first refusal, tag along rights, drag along rights, put and call rights, pre-emptive rights and customary confidentiality agreements and non-compete and non-solicit covenants with respect to certain current and former members of our management team.

In connection with this offering, the parties will amend and restate the Existing Stockholders Agreement (the “Stockholders Agreement”) and Ply Gem Holdings will become a party to the agreement so that the Stockholders Agreement will be between Ply Gem Holdings, Ply Gem Prime, the CI Partnerships and certain of our current and former members of management and their related parties, including Messrs. Robinette, Poe, Wayne, Buckley, and Morstad (collectively with the CI Partnerships, the “Pre-IPO Stockholders”). As described below, the Stockholders Agreement will contain provisions related to stockholder voting, the composition of our board of directors and the committees of our board, our corporate governance, restrictions on the transfer of shares of our capital stock and certain other provisions.

Voting agreements

Under the Stockholders Agreement, each of the Pre-IPO Stockholders has agreed to vote all shares of our voting stock held by it as directed by the CI Partnerships (or if such partnerships are dissolved, their general partner) in any voting matter before our stockholders including, without limitation, elections of directors, amendments to our certificate of incorporation, approvals of mergers and other transactions or stockholder proposals, whether in an annual stockholder meeting, special stockholder meeting or an action by written consent.

 

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Board of directors and committees

Under the Stockholders Agreement, the CI Partnerships (or if such partnerships are dissolved, their general partner) will be entitled to nominate such number of directors to our board of directors (rounded up to the nearest whole number) equal to the percentage of our common stock beneficially owned by the Pre-IPO Stockholders (assuming the exercise or conversion of all outstanding options (whether vested or unvested) and convertible or exchangeable securities held by the Pre-IPO Stockholders).

Our board of directors will initially consist of eight directors and the CI Partnerships will initially have the right to nominate six directors on our board. It is expected that the CI Partnerships initial board nominees will be Messrs. Iseman, Lefkowitz, Hall, Ferris, Roach and Haley.

The Stockholders Agreement will also provide that the CI Partnerships (or if such partnerships are dissolved, their general partner) will be entitled to nominate such number of directors to our standing committees of the board of directors (other than the Audit Committee) (rounded up to the nearest whole number) equal to the percentage of our common stock beneficially owned by the Pre-IPO Stockholders (assuming the exercise or conversion of all outstanding options (whether vested or unvested) and convertible or exchangeable securities held by the Pre-IPO Stockholders).

Our Compensation Committee will initially consist of four directors and the CI Partnerships will initially have the right to designate three members of our Compensation Committee. It is expected that the initial Compensation Committee members designated by the CI Partnerships will be Messrs. Ferris, Hall and Lefkowitz.

Our Nominating and Governance Committee will initially consist of four directors and the CI Partnerships will initially have the right to designate three members of our Nominating and Governance Committee. It is expected that the initial Nominating and Governance Committee members designated by the CI Partnerships will be Messrs. Iseman, Hall and Lefkowitz.

In the event that a vacancy is created on our board of directors or any committee thereof for any reason, the CI Partnerships (or if such partnerships are dissolved, their general partner) will have the right to designate a director or committee member to fill such vacancy to the extent the CI Partnerships (or if such partnerships are dissolved, their general partner) had the right to designate or nominate the director or committee member who created the vacancy. The right of the CI Partnerships to nominate any board member or committee member will be subject to compliance with applicable federal and state securities laws and the rules of the NYSE (or any securities exchange on which any of our equity securities may then be listed or admitted for trading) and, with respect to the Compensation Committee, subject to compliance with Section 162(m) of the Code to the extent that our board of directors elects to satisfy Section 162(m)’s outside directors requirements.

General restrictions on transfer

Subject to certain limited exceptions, no Pre-IPO Stockholder may transfer its shares of common stock (or stock options or other securities exercisable or convertible or exchangeable for shares of our common stock), unless the transferee agrees to become a party to the Stockholders Agreement.

 

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Management restrictions on transfer

Under the Stockholders Agreement, each member of our senior management and any related entities, including Messrs. Robinette, Poe, Wayne, Buckley, and Morstad (collectively, the “Management Stockholders”), and certain other stockholders (collectively with the Management Stockholders, the “Restricted Stockholders”), will agree to restrict their ability to transfer (i) our common stock issued to him or it in the Reorganization Transactions (the “Initial Common Stock”) and (ii) options to purchase our common stock whether issued prior to or in connection with this offering (whether vested or unvested) (the “Initial Option Securities”). Subject to certain exceptions, such as transfers to permitted transferees, each Restricted Stockholder may only transfer his or its Initial Common Stock and Initial Option Securities as follows:

 

 

Prior to the first anniversary of this offering, up to 20% of the Initial Common Stock and 20% of the Initial Option Securities;

 

 

On and after the first anniversary of this offering and through the second anniversary of this offering, up to an additional 40% of the Initial Common Stock and 40% of the Initial Option Securities; and

 

 

After the second anniversary of this offering, up to 100% of the Initial Common Stock and up to 100% of the Initial Option Securities.

Notwithstanding the foregoing limitations, at any time after this offering, if the CI Partnerships (or if such partnerships are dissolved, their general partner) sell any of our common stock held by them in an underwritten public offering, then each Restricted Stockholder may sell its Initial Common Stock and Initial Option Securities in such public offering on a pro rata basis with the CI Partnerships (or if such partnerships are dissolved, their general partner). These restrictions on transfer will terminate upon a change of control of our Company. In addition, the restrictions on transfer will terminate with respect to any Management Stockholder whose employment is terminated by the Company, who resigns for good reason or who retires. These restrictions on transfer may be amended or waived by our board of directors in its sole discretion.

Other provisions

The Stockholders Agreement will contain customary confidentiality agreements from the Pre-IPO Stockholders and covenants from the Management Stockholders not to compete with us or solicit employees from us for a period of one year following termination of employment with us (whether such termination was voluntary or involuntary or with or without cause or good reason).

The Stockholders Agreement will require us to deliver to the CI Partnerships (or if such partnerships are dissolved, their general partner) a copy of our unaudited monthly management report (including our unaudited consolidated balance sheet and income statement) as soon as it is available after the end of each monthly accounting period, a copy of our annual strategic plan and budget as soon as practicable following board approval and such other information and data with respect to us as the CI Partnerships may reasonably request, subject to customary confidentiality provisions. In addition, we will be required to give the CI Partnerships, their manager and their general partner and outside accountants, auditors, legal counsel and other authorized representatives or agents of such persons reasonable access to our books and records and all documents and information related to our properties, assets and business as they may reasonably request, including access to our properties and employees.

 

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Under the Stockholders Agreement, we will also agree that until the CI Partnerships and certain related parties cease to beneficially own, in the aggregate, at least 15% of our outstanding common stock (assuming the exercise or conversion of all outstanding options (whether vested or unvested) and convertible or exchangeable securities held by the CI Partnerships and certain related parties) we will elect not to be governed by section 203 of the Delaware General Corporation Law. (However, our amended and restated certificate of incorporation will contain provisions that have the same effect as section 203 of the Delaware General Corporation Law, except that the CI Partnerships and their respective affiliates and successors and certain of their transferees as a result of private sales will not be subject to such restrictions.) We will also agree that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of the CI Partnerships or certain related parties or any directors of the Company who are employees of the CI Partnerships or their affiliates. See “Risk factors —Risks related to this offering and our common stock —Our directors who have relationships with the CI Partnerships may have conflicts of interest with respect to matters involving our Company.”

Under the Stockholders Agreement, we will agree to indemnify the CI Partnerships from any losses arising directly or indirectly out of the CI Partnerships actual, alleged or deemed control or ability to influence control of us or the actual or alleged act or omission of any director nominated by the CI Partnerships, including any act or omission in connection with this offering.

Under the Stockholders Agreement, we have agreed to reimburse the CI Partnerships (or if such partnerships are dissolved, their general partner) for all reasonable out-of-pocket fees and expenses incurred in connection with the transactions contemplated by the Stockholders Agreement and the ongoing monitoring of their investments in our Company.

Termination

The Stockholders Agreement will terminate upon the earliest to occur of (i) an agreement among us, the CI Partnerships (or if such partnerships are dissolved, their general partner) and the other Pre-IPO Stockholders holding a majority of the voting stock held by the Pre-IPO Stockholders (other than the CI Partnerships and certain related parties) to terminate the Stockholders Agreement or (ii) as to any Pre-IPO Stockholder (with respect to any provisions other than the confidentiality, non-compete and non-solicitation provisions applicable to the Management Stockholders), if such Pre-IPO Stockholder no longer owns any shares of our common stock (or stock options or other securities exercisable or convertible or exchangeable for shares of our common stock) other than by reason of a transfer in violation of the Stockholders Agreement.

In addition, the voting agreement and the provisions relating to the right to nominate or designate directors and committee members will terminate at such time as the Pre-IPO Stockholders cease to beneficially own at least 15% of our common stock outstanding immediately prior to the consummation of this offering (after giving effect to the Reorganization Transactions) (assuming the exercise or conversion of all outstanding options (whether vested or unvested) and convertible or exchangeable securities held by the Pre-IPO Stockholders).

Registration rights agreement

Prior to the consummation of this offering, we will enter into a registration rights agreement with the Pre-IPO Stockholders. Subject to several exceptions, including our right to defer a demand registration under certain circumstances, the CI Partnerships (or if such partnerships are dissolved, their general partner) may require that we register for public resale under the

 

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Securities Act all shares of common stock that they request be registered at any time following this offering so long as the securities being registered in each registration statement are reasonably expected to produce aggregate proceeds of at least $20.0 million. We will not be obligated to effectuate more than five demand registrations under this agreement. If we become eligible to register the sale of our securities on Form S-3 under the Securities Act, the CI Partnerships (or if such partnerships are dissolved, their general partner) have the right to require us to register the sale of the common stock held by them on Form S-3, subject to offering size and other restrictions. The other Pre-IPO Stockholders are entitled to piggyback registration rights with respect to any registration request made by the CI Partnerships (or if such partnerships are dissolved, their general partner). If the registration requested by the CI Partnerships (or if such partnerships are dissolved, their general partner) is in the form of a firm underwritten offering, and if the managing underwriter of the offering determines that the number of securities to be offered would have a material adverse effect on the distribution or sales price of the shares of common stock in the offering, the number of shares included in the offering will be determined as follows:

 

 

first, shares offered by the Pre-IPO Stockholders who request to include their shares in the registration (pro rata, based on the number of registrable securities owned by such Pre-IPO Stockholders);

 

 

second, shares offered by any other stockholders (pro rata, based on the number of registrable securities owned by such stockholder) except to the extent any such holders have agreed under existing agreements to grant priority with regard to participation in such offering to any other holders of our securities; and

 

 

third, shares offered by us for our own account.

In addition, the Pre-IPO Stockholders have been granted piggyback rights on any registration for our account or the account of another stockholder. If the managing underwriter in an underwritten offering determines that the number of securities offered in a piggyback registration would have a material adverse effect on the distribution or sales price of the shares of common stock in the offering, the number of shares included in the offering will be determined as follows:

 

 

first, shares offered by us for own account if we have initiated such registration or by any stockholders exercising demand rights with respect to such registration (pro rata, based on the number of registrable securities owned by the requesting stockholders);

 

 

second, shares offered by any of our other stockholders (including the Pre-IPO Stockholders) (pro rata, based on the number of registrable securities owned by such stockholder); and

 

 

third, shares offered by us for our own account if any stockholder initiated such registration by exercising demand rights.

In connection with the registrations described above, we will indemnify any selling stockholders and we will bear all fees, costs and expenses (except underwriting discounts and selling commissions).

General advisory agreement

Upon completion of the Ply Gem acquisition, Ply Gem Industries entered into an advisory agreement with an affiliate of CI Capital Partners LLC (the “CI Party”), which we refer to as the “General Advisory Agreement.”

 

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Under the General Advisory Agreement, the CI Party provides us with acquisition and financial advisory services as the board of directors shall reasonably request. In consideration of these services, Ply Gem Industries agreed to pay the CI Party (1) an annual fee equal to 2% of our EBITDA, as defined in such agreement, (2) a transaction fee, payable upon the completion by us of any acquisition, of 2% of the sale price, (3) a transaction fee, payable upon the completion by us of any divestitures, of 1% of the sale price, and (4) a transaction fee, payable upon the completion of the sale of our company, of 1% of the sale price. EBITDA in the General Advisory Agreement is based on our net income (loss) plus extraordinary losses and/or any net capital losses realized, provision for income taxes, interest expense (including amortization or write-off of debt discount and debt issuance costs and commissions, and other items), depreciation and amortization, dividends paid or accrued on preferred stock, certain management fees paid to the CI Party, charges related to certain phantom units, and a number of other items. The annual fee payable in any year may not exceed the amounts permitted under the senior credit facilities or the indenture governing the 8.25% Senior Secured Notes. The CI Party is obligated to return any portion of the annual fee that has been prepaid if an event of default has occurred and is continuing under either the senior credit facilities or the indenture governing the 8.25% Senior Secured Notes.

The initial term of the General Advisory Agreement is 10 years, and is automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or the CI Party provide notice of termination. In addition, the General Advisory Agreement may be terminated by the CI Party at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of our shares or shares of any of our parent companies.

During the fourth quarter of 2012, Ply Gem Industries and the CI Party amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. If the General Advisory Agreement is terminated for any reason prior to the end of such extended term, Ply Gem Industries will pay to the CI Party an amount equal to the present value of the annual advisory fees that would have been payable through the end of the term or three years, whichever is less, based on Ply Gem Industries’ cost of funds to borrow amounts under the Ply Gem Industries’ senior credit facilities.

Under the General Advisory Agreement, the Company paid management fees of approximately $0.2 million for the three months ended March 30, 2013 and $2.5 million, $2.3 million, and $2.5 million for the years ended December 31, 2012, 2011, and 2010, respectively.

The General Advisory Agreement will be terminated upon the consummation of this offering. Upon the consummation of this offering and the termination of the General Advisory Agreement, a termination fee equal to $17.5 million will be paid to the CI Party.

Tax sharing agreement

Prior to January 11, 2010, Ply Gem Prime was the common parent of an affiliated group of corporations that included Ply Gem Investment Holdings, Ply Gem Holdings, Ply Gem Industries and their subsidiaries. Ply Gem Prime elected to file consolidated federal income tax returns on behalf of the group. Accordingly, on February 24, 2006, Ply Gem Prime, Ply Gem Investment Holdings, Ply Gem Industries and Ply Gem Holdings entered into an Amended and Restated Tax Sharing Agreement, under which Ply Gem Investment Holdings, Ply Gem Industries and Ply Gem Holdings agreed to make payments to Ply Gem Prime. These payments will not be in excess of the tax liabilities of Ply Gem Investment Holdings, Ply Gem Industries, Ply Gem Holdings and their respective subsidiaries, if these tax liabilities had been computed on a stand-alone basis. On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime being the surviving

 

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corporation. As a result, on March 17, 2011, we entered into a Second Amended and Restated Tax Sharing Agreement, effective as of January 11, 2010, so that the tax sharing agreement is among Ply Gem Prime, Ply Gem Holdings and Ply Gem Industries. In connection with the Reorganization Transactions, Ply Gem Prime will merge with and into Ply Gem Holdings with Ply Gem Holdings being the surviving corporation. As a result, we will enter into a Third Amended and Restated Tax Sharing Agreement in connection with the Reorganization Transactions so that the tax sharing agreement is between Ply Gem Holdings and Ply Gem Industries.

Tax receivable agreement

In order to induce the stockholders of Ply Gem Prime to consent to the initial public offering and the related transactions, we intend to enter into a tax receivable agreement with the Tax Receivable Entity (an entity controlled by our current stockholders). We are entering into the tax receivable agreement because certain favorable tax attributes related to the period prior to this offering will be available to us. Specifically, we have substantial deferred tax assets related to NOLs for United States federal and state income tax purposes, which are available to offset future taxable income. The CI Partnerships and our other current stockholders believe that the value of these tax attributes should be considered in determining the value of our shares being sold in this offering. Since it might be difficult to determine the present value of these attributes with certainty, the tax receivable agreement will generally provide for the payment by us to the Tax Receivable Entity of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize in periods after this offering as a result of (i) NOL carryovers from periods (or portions thereof) ending before January 1, 2013, (ii) deductible expenses attributable to the transactions related to this offering and (iii) deductions related to imputed interest deemed to be paid by us as a result of this tax receivable agreement. We will retain the benefit of the remaining 15% of these tax savings.

The amount and timing of any payments under the tax receivable agreement will vary depending upon a number of factors, including the amount and timing of the taxable income we generate in the future and the tax rate then applicable, our use of NOL carryovers and the portion of our payments under the tax receivable agreement constituting imputed interest.

The payments we will be required to make under the tax receivable agreement could be substantial. We expect that, as a result of the amount of the NOL carryovers from prior periods (or portions thereof) and the deductible expenses attributable to the transactions related to this offering, assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize in full the potential tax benefit described above, future payments under the tax receivable agreement, in respect of the federal and state NOL carryovers, will be approximately $86.8 million in the aggregate and will be paid within the next five years, assuming that utilization of such tax attributes is not subject to limitation under Section 382 of the Code as the result of an “ownership change” (within the meaning of Section 382 of the Code) of Ply Gem Holdings. It is possible that future transactions or events could increase or decrease the actual tax benefits realized from these tax attributes and the corresponding tax receivable agreement payments.

In addition, although we are not aware of any issue that would cause the IRS to challenge the benefits arising under the tax receivable agreement, the Tax Receivable Entity will not reimburse us for any payments previously made if such benefits are subsequently disallowed, however, any excess payments made to the Tax Receivable Entity will be netted against payments otherwise to be made, if any, after our determination of such excess. As a result, in such circumstances, we could make payments under the tax receivable agreement that are greater than our actual cash tax savings and may not be able to recoup those payments, which could adversely affect our liquidity.

 

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Finally, because we are a holding company with no operations of our own, our ability to make payments under the tax receivable agreement is dependent on the ability of our subsidiaries to make distributions to us. The ABL Facility and the indentures governing the 8.25% Senior Secured Notes and the 9.375% Senior Notes may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the tax receivable agreement. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid, which could adversely affect our results of operations and could also affect our liquidity in periods in which such payments are made.

In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, or other forms of business combinations or certain other changes of control, our or our successor’s obligations with respect to tax benefits would be based on certain assumptions, including that we or our successor would have sufficient taxable income to fully utilize the NOL carryovers covered by the tax receivable agreement. As a result, upon a change of control, we could be required to make payments under the tax receivable agreement that are greater than or less than the specified percentage of our actual cash tax savings.

Senior subordinated notes

In 2009, affiliates of the CI Partnerships purchased approximately $281.4 million aggregate principal amount of the 9% Senior Subordinated Notes. Approximately $218.8 million aggregate principal amount of such 9% Senior Subordinated Notes held by such affiliates were transferred to our indirect stockholders and ultimately to Ply Gem Prime. Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries as a capital contribution and canceled on February 12, 2010. In exchange for their contribution of the 9% Senior Subordinated Notes, the CI Partnerships received equity of Ply Gem Prime valued at approximately $114.9 million consisting of 719,362 shares of common stock and 57,380 shares of Series E Senior Preferred Stock. No consideration was received by any other indirect stockholder of Ply Gem Prime in connection with the transfer of the 9% Senior Subordinated Notes. On February 16, 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million aggregate principal amount of the 9% Senior Subordinated Notes held by affiliates of the CI Partnerships). During the year ended December 31 2010, the Company paid these affiliates approximately $9.8 million of interest for the 9% Senior Subordinated Notes owned by these related parties. In connection with the 9% Senior Subordinated Notes transaction, Ply Gem Prime paid affiliates of CI Capital Partners approximately $1.6 million for advisory services.

Other transactions

During 2010, Ply Gem Prime received equity contributions of approximately $2.5 million from certain members of management, including Messrs. Morstad, Poe and Schmoll. In exchange for their equity contribution, Mr. Morstad received 1,565 shares of Ply Gem Prime common stock and 124.8 shares of Ply Gem Prime Series E Senior Preferred Stock, Mr. Poe received 2,191 shares of Ply Gem Prime common stock and 174.720 shares of Ply Gem Prime Series E Senior Preferred Stock and Mr. Schmoll received 626 shares of Ply Gem Prime common stock and 49.920 shares of Ply Gem Prime Series E Senior Preferred Stock. In addition, we repurchased equity of approximately $4.2 million from certain former members of management. As of December 31, 2010, approximately $1.2 million was classified as a current liability in accrued expenses in the

 

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consolidated balance sheet. During the year ended December 31, 2011, the approximate $1.2 million was paid in cash by the Company and reflected as an equity repurchase in 2011 on the Company’s consolidated statement of cash flows.

On May 27, 2010, Ply Gem Prime entered into a subscription agreement with certain members of our board of directors and certain other affiliates of CI Capital Partners for the issuance of an aggregate of 10,775.15 shares of Senior Preferred Stock of Ply Gem Prime for aggregate proceeds of $1,077,515. Pursuant to this subscription agreement, Ply Gem Prime issued 6,761.71 shares of Senior Preferred Stock to an entity controlled by Frederick Iseman, 1,266.86 shares of Senior Preferred Stock to an entity controlled by Steven Lefkowitz, 240.65 shares of Senior Preferred Stock to Timothy Hall, 1,789.75 shares of Senior Preferred Stock to an entity controlled by Robert Ferris and 716.18 shares to other affiliates of CI Capital Partners. Also on May 27, 2010, Ply Gem Prime entered into an agreement to repurchase from Gary E. Robinette, our President and Chief Executive Officer, 7,434 shares of Senior Preferred Stock of Ply Gem Prime for $1,077,515. Mr. Robinette’s Senior Preferred Stock was repurchased upon the closing of the Senior Preferred Stock issuance referred to above, and upon such repurchase his shares of Senior Preferred Stock were canceled.

During June 2010, the Company made a state tax payment of approximately $1.5 million for Ply Gem Prime. Ply Gem Prime incurred a state tax liability as a result of the 9% Senior Subordinated Notes debt extinguishment and related contribution during the first quarter of 2010 in which Ply Gem Prime recognized a capital gain of approximately $13.3 million. Ply Gem Prime is a holding company with no independent operating assets or liabilities other than its investment in the Company and therefore had no ability to make tax payments. The Company recognized this payment as a return of capital in the Company’s consolidated balance sheet as of December 31, 2010.

During the fourth quarter of 2011, Ply Gem Prime entered into a stock repurchase agreement with the Company’s Chief Executive Officer providing for the repurchase of 125,660 shares of common stock of Ply Gem Prime for $12.6 million. The repurchase was made by Ply Gem Prime with cash proceeds provided by the Company. Also during 2011, the Company repurchased equity of approximately $0.3 million from a former member of management.

Indemnification arrangements

We will enter into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification provided for in our charter documents. We believe that these provisions and agreements are necessary to attract qualified officers and directors. We will purchase a policy of directors’ and officers’ liability insurance that insures our officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our obligations to indemnify our officers and directors.

Related party transactions policies and procedures

In connection with this offering, we will adopt a written Related Person Transaction Policy (the “policy”), which will set forth our policy with respect to the review, approval and ratification of all related person transactions by our Audit Committee. In accordance with the policy, our Audit Committee will have overall responsibility for the implementation and compliance with this policy.

For the purposes of the policy, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we

 

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were, are or will be a participant and the amount involved exceeds $120,000 and in which any related person (as defined in the policy) had, has or will have a direct or indirect material interest. A “related person transaction” does not include any employment relationship or transaction involving an executive officer and any related compensation resulting solely from that employment relationship which has been reviewed and approved by our board of directors or Compensation Committee.

Our policy will require that notice of a proposed related person transaction be provided to our legal department prior to entering into such transaction. If our legal department determines that such transaction is a related person transaction, the proposed transaction will be submitted to our Audit Committee for consideration at its next meeting. Under the policy, our Audit Committee may only approve those related person transactions that are in, or not inconsistent with, our best interests. In the event we become aware of a related person transaction that has not been previously reviewed, approved or ratified under our policy and that is ongoing or is completed, the transaction will be submitted to the Audit Committee so that it may determine whether to ratify, rescind or terminate the related person transaction.

Our policy will also provide that the Audit Committee review certain previously approved or ratified related person transactions that are ongoing to determine whether the related person transaction remains in our best interests and the best interests of our stockholders. Additionally, we will also make periodic inquiries of directors and executive officers with respect to any potential related person transaction of which they may be a party or of which they may be aware.

 

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Description of capital stock

Capital stock

In connection with this offering, we expect to amend our certificate of incorporation so that our authorized capital stock will consist of                  shares of common stock, par value $0.01 per share, and                  shares of preferred stock, par value $0.01 per share. After the consummation of this offering and after giving effect to the Reorganization Transactions, we expect to have                  shares of common stock and no shares of preferred stock outstanding. Summarized below are material provisions of our certificate of incorporation and by-laws as they will be in effect upon the completion of this offering, as well as relevant sections of the Delaware General Corporation Law (the “DGCL”). The following summary is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and by-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and by the applicable provisions of the DGCL.

Common stock

The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors. Holders of the common stock do not have any preemptive rights or cumulative voting rights, which means that the holders of a majority of the outstanding common stock voting for the election of directors can elect all directors then being elected. The holders of our common stock are entitled to receive dividends when, as, and if declared by our board out of legally available funds. Upon our liquidation or dissolution, the holders of common stock will be entitled to share ratably in those of our assets that are legally available for distribution to stockholders after payment of liabilities and subject to the prior rights of any holders of preferred stock then outstanding. All of the outstanding shares of common stock are, and the shares of common stock to be sold in this offering when issued and paid for will be, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of shares of any series of preferred stock that may be issued in the future.

Preferred stock

After the consummation of this offering, we will be authorized to issue up to                 shares of preferred stock. Our board of directors will be authorized, subject to limitations prescribed by Delaware law and our certificate of incorporation, to determine the terms and conditions of the preferred stock, including whether the shares of preferred stock will be issued in one or more series, the number of shares to be included in each series and the powers, designations, preferences and rights of the shares. Our board of directors will also be authorized to designate any qualifications, limitations or restrictions on the shares without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our Company and may adversely affect the voting and other rights of the holders of our common stock, which could have an adverse impact on the market price of our common stock. We have no current plan to issue any shares of preferred stock following the consummation of this offering.

Corporate opportunity

Our amended and restated certificate of incorporation will provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of the CI Partnerships or certain related parties or any directors of the Company who are employees of the

 

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CI Partnerships or their affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our customers. See “Risk factors—Risks related to this offering and our common stock—We are controlled by the CI Partnerships whose interest in our business may be different than yours, and certain statutory provisions afforded to stockholders are not applicable to us.”

Certain certificate of incorporation, by-law and statutory provisions

The provisions of our amended and restated certificate of incorporation and by-laws and of the DGCL summarized below may have an anti-takeover effect and may delay, prevent or deter a tender offer or takeover attempt that you might consider in your best interest, including an attempt that might result in your receipt of a premium over the market price for your shares.

Directors’ liability; Indemnification of directors and officers

Section 145 of the DGCL authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursements for expenses incurred arising under the Securities Act.

Our amended and restated certificate of incorporation will provide that a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except:

 

 

for any breach of the duty of loyalty;

 

 

for acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law;

 

 

for liability under Section 174 of the DGCL (relating to unlawful dividends, stock repurchases or stock redemptions); or

 

 

for any transaction from which the director derived any improper personal benefit.

The effect of this provision is to eliminate our rights, and our stockholders’ rights, to recover monetary damages against a director for breach of a fiduciary duty of care as a director. This provision does not limit or eliminate our rights or those of any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director’s duty of care. The provisions will not alter the liability of directors under federal securities laws. In addition, our amended and restated certificate of incorporation will provide that we indemnify each director and the officers, employees and agents determined by our board of directors to the fullest extent provided by the laws of the State of Delaware. Our amended and restated certificate of incorporation will also require us to advance expenses, including attorneys’ fees, to our directors and officers in connection with legal proceedings, subject to very limited exceptions.

Any amendment to or repeal of these provisions will not adversely affect any right or protection of our directors in respect of any act or failure to act that occurred prior to any amendment to or repeal of such provisions or the adoption of an inconsistent provision. If the DGCL is amended to provide further limitation on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the DGCL. In addition, prior to the completion of this offering, we intend to enter into separate indemnification agreements with each of our directors and executive officers. We also intend to maintain director and officer liability insurance, if available on reasonable terms.

 

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Special meetings of stockholders

Our amended and restated certificate of incorporation will provide that special meetings of stockholders may be called only by the chairman, by a majority of the members of our board or, until the point in time at which the CI Partnerships and their affiliates no longer beneficially own shares representing more than 50% of our outstanding shares of common stock (the “Triggering Event”), at the request of holders of 50% or more of our outstanding shares of common stock. Except as described above, stockholders will not be permitted to call a special meeting of stockholders, to require that the chairman call such a special meeting, or to require that our board request the calling of a special meeting of stockholders. These provisions, taken together, will prevent stockholders from forcing consideration by the stockholders of stockholder proposals over the opposition of the board, except at an annual meeting or under the circumstances described above.

Stockholder action; Advance notice requirements for stockholder proposals and director nominations

Prior to the Triggering Event, stockholders may take action by written consent if the consent is signed by holders of our outstanding shares of capital stock having the number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present. Our amended and restated certificate of incorporation will provide that, following the Triggering Event, stockholders may not take action by written consent, but may only take action at duly called annual or special meetings, unless the action to be effected by written consent and the taking of such action by written consent have expressly been approved in advance by the board.

In addition, our amended and restated by-laws will establish advance notice procedures for:

 

 

stockholders to nominate candidates for election as a director; and

 

 

stockholders to propose topics for consideration at stockholders’ meetings.

Stockholders must notify our corporate secretary in writing prior to the meeting at which the matters are to be acted upon or directors are to be elected. The notice must contain the information specified in our by-laws including, but not limited to, information with respect to the beneficial ownership of our common stock or derivative securities that have a value associated with our common stock held by the proposing stockholder and its associates and any voting or similar agreement the proposing stockholder has entered into with respect to our common stock. To be timely, the notice must be received at our corporate headquarters not less than 90 days nor more than 120 days prior to the first anniversary of the date of the prior year’s annual meeting of stockholders. If the annual meeting is advanced by more than 30 days, or delayed by more than 60 days, from the anniversary of the preceding year’s annual meeting, or if no annual meeting was held in the preceding year or for the first annual meeting following this offering, notice by the stockholder, to be timely, must be received not earlier than the 120th day prior to the annual meeting and not later than the later of the 90th day prior to the annual meeting or the 10th day following the day on which we notify stockholders of the date of the annual meeting, either by mail or other public disclosure. In the case of a special meeting of stockholders called to elect directors, the stockholder notice must be received not earlier than 120 days prior to the special meeting and not later than the later of the 90th day prior to the special meeting or 10th day following the day on which we notify stockholders of the date of the special meeting, either by mail or other public disclosure. Notwithstanding the above, in the

 

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event that the number of directors to be elected to the board at an annual meeting is increased and we do not make any public announcement naming the nominees for the additional directorships at least 100 days before the first anniversary of the preceding year’s annual meeting, a stockholder notice of nomination shall also be considered timely, but only with respect to nominees for the additional directorships, if it is delivered not later than the close of business on the 10th day following the day on which such public announcement is first made. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual or special meeting or from nominating candidates for director at an annual or special meeting.

Election and removal of directors

In connection with this offering, our board of directors will be divided into three classes with the classes to be as nearly equal in number as possible. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. Prior to the Triggering Event, our stockholders may remove directors with or without cause with the vote of at least a majority of the total voting power of our issued and outstanding capital stock entitled to vote in the election of directors. Following the Triggering Event, our stockholders may only remove directors for cause and with the vote of at least 75% of the total voting power of our issued and outstanding capital stock entitled to vote in the election of directors. Our board of directors may elect a director to fill a vacancy, including vacancies created by the expansion of the board of directors. This system of electing and removing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of our directors.

Our amended and restated certificate of incorporation and by-laws will not provide for cumulative voting in the election of directors.

Amendment of the certificate of incorporation and by-laws

Prior to the Triggering Event, our amended and restated certificate of incorporation may be amended with the affirmative vote of the holders of a majority of our issued and outstanding capital stock entitled to vote. Following the Triggering Event, our amended and restated certificate of incorporation will provide that the affirmative vote of the holders of at least 75% of the voting power of our issued and outstanding capital stock entitled to vote in the election of directors is required to amend the following provisions of our certificate of incorporation:

 

 

the provisions relating to creating a board of directors that is divided into three classes with staggered terms;

 

 

the provisions relating to the number and election of directors, the appointment of directors upon an increase in the number of directors or vacancy and the provisions relating to the removal of directors;

 

 

the provisions requiring a 75% stockholder vote for the adoption, amendment or repeal of our by-laws following the Triggering Event as described below;

 

 

the provisions barring stockholders from calling a special meeting of stockholders or requiring one to be called following the Triggering Event;

 

 

the elimination of the right of our stockholders to act by written consent following the Triggering Event;

 

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the provisions restricting business combinations with interested stockholders as described below;

 

 

the provisions that provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any of the CI Partnerships or certain related parties or any directors of the Company who are employees of the CI Partnerships or their affiliates as described above;

 

 

the provisions relating to the forum for adjudication of disputes; and

 

 

the amendment provisions of the certificate of incorporation.

In addition, the board of directors will be permitted to alter our by-laws without obtaining stockholder approval. Prior to the Triggering Event, stockholders may alter our by-laws with the affirmative vote of the holders of a majority of our issued and outstanding shares of capital stock entitled to vote. Following the Triggering Event, stockholders may only alter our by-laws with the affirmative vote of at least 75% of the voting power of our issued and outstanding shares of capital stock entitled to vote.

Business combinations with interested stockholders

In general, section 203 of the Delaware General Corporation Law prevents an interested stockholder, which is defined generally as a person owning 15% or more of the corporation’s outstanding voting stock, of a Delaware corporation from engaging in a business combination (as defined therein) for three years following the date that person became an interested stockholder unless various conditions are satisfied. Under our amended and restated certificate of incorporation, we will opt out of the provisions of section 203. Accordingly, we will not be subject to any anti-takeover effects of section 203. Nevertheless, our amended and restated certificate of incorporation will contain provisions that have the same effect as section 203, except that they will provide that the CI Partnerships and their respective affiliates and successors and certain of their transferees as a result of private sales will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.

Transfer agent and registrar

The transfer agent and registrar for our common stock will be American Stock Transfer and Trust Company.

New York Stock Exchange listing

We intend to apply to list our common stock on the NYSE under the symbol “PGEM.”

 

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Shares available for future sale

Prior to this offering, there has been no public market for our common stock. We cannot make any prediction as to the effect, if any, that sales of common stock or the availability of common stock for sale will have on the market price of our common stock. The market price of our common stock could decline because of the sale of a large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. See “Risk factors—Risks related to this offering and our common stock—Future sales of shares of our common stock in the public market could cause our stock price to fall significantly even if our business is profitable.

Sale of restricted shares

Upon the consummation of this offering, we will have          shares of common stock outstanding (or         shares if the underwriters exercise their over-allotment option in full), excluding          shares of common stock underlying outstanding options. Of these shares, the          shares sold in this offering (or          shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction or further restriction under the Securities Act, except that any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. As defined in Rule 144, an affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the issuer. After this offering, approximately          of our outstanding shares of common stock will be deemed “restricted securities,” as that term is defined under Rule 144. Restricted securities may be sold in the public market only if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, which rules are summarized below, or any other applicable exemption under the Securities Act. Immediately following the consummation of this offering, the holders of approximately          shares of common stock will be entitled to dispose of their shares pursuant to the holding period, volume and other restrictions of Rule 144 under the Securities Act, and the holders of approximately          shares of common stock, representing approximately         % of our outstanding common stock (or         % if the underwriters exercise their over-allotment option in full), will be entitled to dispose of their shares following the expiration of an initial 180-day underwriter “lock-up” period pursuant to the holding period, volume and other restrictions of Rule 144. The underwriters are entitled to waive these lock-up provisions at their discretion prior to the expiration dates of such lock-up agreements.

Rule 144

The availability of Rule 144 will vary depending on whether restricted securities are held by an affiliate or a non-affiliate. In general, under Rule 144, as in effect on the date of this prospectus, an affiliate who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the average weekly trading volume of our common stock reported through the NYSE during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about our Company. The volume limitations, manner of sale and notice provisions described above will not apply to sales by non-affiliates. For purposes of Rule 144, a non-affiliate is any person or entity who is not our affiliate at the time of sale and has not been our affiliate during the preceding 90 days. A non-affiliate who has

 

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beneficially owned restricted securities for six months may rely on Rule 144 provided that certain public information regarding us is available. A non-affiliate who has beneficially owned the restricted securities proposed to be sold for at least one year will not be subject to any restrictions under Rule 144.

Rule 701

In general, Rule 701 under the Securities Act, as in effect on the date of this prospectus, provides that securities issued in reliance on Rule 701 are also restricted and may be sold by stockholders other than our affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one year holding period requirement.

Options/equity awards

We intend to file a registration statement under the Securities Act to register          shares of common stock reserved for issuance under our Equity Plans. Immediately prior to effectiveness of the registration statement of which this prospectus is a part, after giving effect to the Reorganization Transactions, there were                  options outstanding under our Equity Plans to purchase a total of          shares of our common stock, of which options to purchase          shares were exercisable immediately. Shares issued upon the exercise of stock options after the effective date of the registration statement will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements described below.

Lock-up agreements

Other than in connection with the sale of shares in this offering, the CI Partnerships, our executive officers and our directors have agreed that, for a period of 180 days after the date of this prospectus, subject to certain extensions and with specified exceptions, they will not, without the prior written consent of the Representatives, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock.

Immediately following the consummation of this offering, stockholders subject to lock-up agreements will hold          shares of our common stock, representing approximately         % of our then outstanding shares of common stock, or approximately         % if the underwriters exercise their option to purchase additional shares in full.

We have agreed not to issue, sell or otherwise dispose of any shares of our common stock during the 180-day period following the date of this prospectus (subject to certain extensions). We may, however, grant options to purchase shares of common stock, issue shares of common stock upon the exercise of outstanding options under our Equity Plans, issue shares of common stock in connection with an acquisition or business combination and in certain other circumstances.

The 180-day restricted period described in the preceding paragraphs will be automatically extended if (i) during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event relating to us occurs or (ii) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period beginning on the last day of the 180-day restricted period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

Registration rights

In connection with this offering, we will enter into a registration rights agreement to grant registration rights to the CI Partnerships and the other Pre-IPO Stockholders. Subject to the

 

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limitations described under “Certain relationships and related party transactions—Registration rights agreement,the CI Partnerships (or if such partnerships are dissolved, their general partner) may require that we register for public resale under the Securities Act all shares of common stock that they request be registered at any time following this offering and the other Pre-IPO Stockholders are entitled to piggyback registration rights with respect to any registration request made by the CI Partnerships (or if such partnerships are dissolved, their general partner). After giving effect to the Reorganization Transactions and this offering and subject to the terms of their lock-up agreements with the underwriters, the CI Partnerships and the other Pre-IPO Stockholders may require that          shares of our common stock be registered for resale pursuant to the registration rights agreement. For more information, see “Certain relationships and related party transactions—Registration rights agreement.

 

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Material U.S. federal income tax consequences

for non-U.S. holders

The following is a discussion of the material U.S. federal income tax consequences to a Non-U.S. Holder, as defined below, of the acquisition, ownership and disposition of shares of our common stock purchased pursuant to this offering. This discussion is based on the Code, Treasury regulations promulgated under the Code (“Treasury Regulations”), administrative pronouncements or practices and judicial decisions, all as of the date hereof. Future legislative, judicial, or administrative modifications, revocations, or interpretations, which may or may not be retroactive, may result in U.S. federal income tax consequences significantly different from those discussed herein. This discussion is not binding on the IRS. No ruling has been or will be sought or obtained from the IRS with respect to any of the U.S. federal tax consequences discussed herein. There can be no assurance that the IRS will not challenge any of the conclusions discussed herein or that a U.S. court will not sustain such a challenge.

The following discussion does not purport to be a full description of all U.S. federal income tax considerations that may be relevant to any Holder, as defined below, in light of such Holder’s particular circumstances and addresses only Holders who hold common stock as capital assets within the meaning of Section 1221 of the Code. This discussion does not address any (i) U.S. federal alternative minimum tax, (ii) U.S. federal estate, gift, or other non-income tax (except as set forth below) or (iii) any state, local, or non-U.S. tax consequences of the acquisition, ownership or disposition of our common stock. In addition, this discussion does not address the U.S. federal income and estate tax consequences to beneficial owners of our common stock subject to special rules, including, among others, beneficial owners that (i) are banks, financial institutions, or insurance companies, (ii) are regulated investment companies or real estate investment trusts, (iii) are brokers, dealers, or traders in securities or currencies, (iv) are tax-exempt organizations, (v) are persons subject to the alternative minimum tax, (vi) are U.S. expatriates, (vii) purchase or hold our common stock as part of hedges, straddles, constructive sales, conversion transactions or other integrated investments, (viii) acquire our common stock as compensation for services or through the exercise or cancellation of employee stock options or warrants or (ix) have a functional currency other than the U.S. dollar.

As used herein, a “Holder” means a beneficial owner of our common stock. If a partnership or other entity classified as a partnership for U.S. federal income tax purposes (a “Partnership”) or an owner or partner in a Partnership is a beneficial owner, the U.S. federal income tax consequences generally will depend on the activities of such Partnership and the status of such owner or partner. A beneficial owner that is a Partnership or an owner or partner in a Partnership should consult its own tax advisor regarding the U.S. federal income tax consequences of the acquisition, ownership and disposition of our common stock.

A “U.S. Holder” means a Holder that is (i) an individual citizen or resident alien of the United States, (ii) a corporation or other entity taxable as a corporation for U.S. federal tax purposes created or organized in the United States, any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust that (a) is subject to the primary jurisdiction of a court within the United States and for which one or more U.S. persons have authority to control all substantial decisions or (b) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. As used herein, a “Non-U.S. Holder” means a Holder that is not a U.S. Holder.

THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS FOR GENERAL INFORMATION ONLY AND IT IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED

 

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TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF SHARES AND NO OPINION OR REPRESENTATION WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH HOLDER OR PROSPECTIVE HOLDER IS MADE. A HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE APPLICATION OF U.S. FEDERAL TAX LAWS TO ITS PARTICULAR CIRCUMSTANCES AND ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL, NON-U.S. OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

Distributions on common stock

As discussed under “Dividend policy,” we do not anticipate making a distribution on common stock in the foreseeable future. If we make a distribution on a Non-U.S. Holder’s common stock, however, then to the extent that such distribution is paid from our current and accumulated earnings and profits as determined under U.S. federal income tax principles (a “dividend”), the dividend generally will be subject to withholding of U.S. federal income tax at a rate of 30% of the gross amount, or any lower rate that may be specified by an applicable tax treaty if we have received proper certification of the application of that tax treaty. If the amount of the distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a return of capital to the extent of a Non-U.S. Holder’s tax basis in our common stock, and thereafter will be treated as capital gain. However, except to the extent that we elect (or the paying agent or other intermediary through which a Non-U.S. Holder holds its common stock elects) otherwise, we (or the intermediary) must generally withhold on the entire distribution, in which case a Non-U.S. Holder would be entitled to a refund from the IRS for the withholding tax on the portion of the distribution that exceeded our current and accumulated earnings and profits. A Non-U.S. Holder should consult its own tax advisor regarding its entitlement to benefits under an applicable tax treaty and the manner of claiming the benefits of such treaty. A Non-U.S. Holder that is eligible for a reduced rate of U.S. federal withholding tax under a tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.

Dividends that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States (and, if certain tax treaties apply, are attributable to a U.S. permanent establishment maintained by such Non-U.S. Holder) are not subject to U.S. withholding tax, but instead are taxed in the manner applicable to U.S. persons. In that case, we will not withhold U.S. federal withholding tax, provided that the Non-U.S. Holder complies with applicable certification and disclosure requirements. In addition, dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States may be subject to a branch profits tax at a rate of 30%, or any lower rate as may be specified in an applicable tax treaty.

Sale or other taxable disposition of common stock

A Non-U.S. Holder generally will not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale, exchange or other taxable disposition of our common stock unless any one of the following is true:

 

 

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States or, if an applicable tax treaty applies, is attributable to a U.S. permanent establishment (or, in the case of an individual, a fixed base) maintained by such Non-U.S. Holder in the United States, in which case the branch profits tax discussed above may also apply to a corporate Non-U.S. Holder;

 

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the Non-U.S. Holder is an individual present in the United States for 183 or more days in the taxable year of the disposition and certain other requirements are met; or

 

 

the Foreign Investment in Real Property Tax Act, or “FIRPTA,” rules apply because (1) our common stock constitutes a U.S. real property interest by reason of our status as a “United States real property holding corporation” (“USRPHC”) for U.S. federal income tax purposes at any time during the shorter of the period during which the Non-U.S. Holder holds our common stock or the five-year period ending on the date on which the Non-U.S. Holder disposes of our common stock; and (2) assuming that our common stock constitutes a U.S. real property interest and is treated as regularly traded on an established securities market within the meaning of applicable Treasury Regulations, the Non-U.S. Holder held, directly or indirectly, at any time within the five-year period preceding the disposition, more than 5% of our common stock.

Generally, a corporation is a USRPHC only if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we are not now, have not been in the last five years and will not become a USRPHC. There can be no assurance regarding our USRPHC status for the current year or future years, however, because USRPHC status is based on the composition of our assets from time to time and on certain rules whose application is uncertain. We may become a USRPHC in the future.

An individual Non-U.S. Holder who is subject to U.S. tax because he or she was present in the United States for 183 or more days during the year of disposition will be taxed on his or her gains, including gains from the disposition of our common stock net of applicable U.S. losses from dispositions of other capital assets incurred during the year, at a flat rate of 30% or a reduced rate under an applicable tax treaty.

An individual Non-U.S. Holder described in the first bullet point above will be subject to tax on his or her gains under regular graduated U.S. federal income tax rates.

U.S. federal estate tax

Shares of common stock owned or treated as owned by an individual who is not a U.S. citizen or resident for U.S. federal estate tax purposes will be considered United States situs assets, will be included in that Non-U.S. Holder’s estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax or other tax treaty provides otherwise.

Backup withholding and information reporting

Under Treasury Regulations, we must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to each Non-U.S. Holder and any tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable tax treaty. Under an applicable tax treaty, that information may also be made available to the taxing authorities in a country in which the Non-U.S. Holder resides or is established.

Backup withholding will generally not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a Non-U.S. Holder if the Holder has provided the certification described above that it is not a U.S. person (generally satisfied by providing the applicable IRS Form W-8) or has otherwise established an exemption, provided we or the paying agent have no actual knowledge or reason to know that the beneficial owner is a U.S. person.

 

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The payment of the proceeds of a disposition of our common stock by a Non-U.S. Holder to or through the U.S. office of a broker generally will be reported to the IRS and reduced by backup withholding unless the Non-U.S. Holder either certifies its status as a Non-U.S. Holder in accordance with applicable Treasury Regulations or otherwise establishes an exemption and the broker has no actual knowledge, or reason to know, to the contrary. The payment of the proceeds of a disposition of our common stock by a Non-U.S. Holder to or through a non-U.S. office of a non-U.S. broker generally will not be reduced by backup withholding or reported to the IRS unless the non-U.S. broker has certain types of relationships with the United States (a “U.S. Related Financial Intermediary”). In the case of the payment of proceeds from the disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. Related Financial Intermediary, the Treasury Regulations require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no knowledge to the contrary.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Non-U.S. Holder’s U.S. federal income tax liability, if any, provided that certain required information is furnished to the IRS. Non-U.S. Holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them and the availability and procedure for obtaining an exemption from backup withholding under current Treasury Regulations.

Each prospective Holder is urged to consult its tax advisor with respect to the U.S. federal income and estate tax consequences of the ownership and disposition of our common stock, as well as the application and effect of the laws of any state, local, foreign or other taxing jurisdiction.

Additional Withholding Requirements

Under sections 1471 through 1474 of the Code (provisions which are commonly referred to as “FATCA”), the relevant withholding agent may be required to withhold 30% of any dividends paid after December 31, 2013, and any proceeds of a sale or other disposition of our common stock paid after December 31, 2016, to (i) a foreign financial institution (whether holding common stock for its own account or on behalf of its account holders/investors) unless such foreign financial institution agrees to verify, report and disclose its U.S. account holders and meets certain other specified requirements or (ii) a non-financial foreign entity that is the beneficial owner of the common stock (or is holding common stock on behalf of any other non-financial foreign entity) unless such entity certifies that it does not have any substantial United States owners or provides the name, address and taxpayer identification number of each substantial United States owner and such entity meets certain other specified requirements. An intergovernmental agreement between the United States and an applicable non-U.S. country may modify such requirements. Non-U.S. holders should consult their own tax advisors regarding the effect of this newly enacted legislation.

 

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Underwriting

We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co. are acting as joint book-running managers and the Representatives. We have entered into an underwriting agreement with the underwriters dated the date of this prospectus. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name    Number of shares

 

J.P. Morgan Securities LLC

  

Credit Suisse Securities (USA) LLC

  

Goldman, Sachs & Co.

  

UBS Securities LLC

  

Deutsche Bank Securities Inc.

  

Zelman Partners LLC

  

BB&T Capital Markets, a division of BB&T Securities, LLC

  

Stephens Inc.

  
  

 

Total

    

The underwriting agreement provides that the underwriters may, in their discretion, terminate their obligations thereunder upon the occurrence of certain stated events. The underwriters are committed to purchase all the common shares in the offering if they purchase any shares, other than the common stock covered by the over-allotment option described below unless and until the over-allotment option is exercised. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated in certain circumstances.

The underwriters have reserved up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock. Participants in the directed share program who purchase more than $1,000,000 of shares shall be subject to a 25-day lock-up with respect to any shares sold to them pursuant to that program. This lock-up will have similar restrictions and an identical extension provision to the lock-up agreements described below. Any shares sold in the directed share program to our directors, executive officers or certain of our significant stockholders shall be subject to the lock-up agreements described below.

The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $         per share. Any such dealers may resell shares to certain

 

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other brokers or dealers at a discount of up to $         per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters.

Sales of shares made outside of the United States may be made by affiliates of the underwriters.

The Representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the shares of common stock offered in this offering. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

The underwriters have an option to buy up to                  additional shares of common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this over-allotment option. If any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $             per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

      Paid by us  
     No exercise      Full exercise  

 

 

Per Share

   $                        $                    

Total

   $         $     

We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $3.0 million. The underwriters have agreed to reimburse us for a portion of our offering expenses.

A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the Representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

We have agreed that we will not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or any securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequences associated with the ownership of any shares of common stock or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be

 

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settled by the delivery of shares of common stock or such other securities, in cash or otherwise, in each case without the prior written consent of the Representatives for a period of 180 days after the date of this prospectus, other than the shares of our common stock to be sold hereunder or issued in the Reorganization Transactions, the issuance by the Company of options to purchase shares of common stock and other equity incentive compensation, including restricted stock or restricted stock units, under stock option or similar plans in effect on the date hereof and as described herein or under stock option or similar plans of acquired companies in effect on the date of acquisition and any shares of our common stock issued upon the exercise of options granted under such stock option or similar plans in effect on the date hereof and as described herein or under stock option or similar plans of acquired companies in effect on the date of acquisition and the filing by us of any registration statement on Form S-8 with the SEC relating to the offering of securities pursuant to the terms of such stock option or similar plans. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our Company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

Our directors and executive officers and certain of our significant stockholders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with certain exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of the Representatives, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant), or publicly disclose the intention to make any offer, sale, pledge or disposition, (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in clauses (i) or (ii) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (iii) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock (except for such demands or exercises as will not require or permit any public filing or other public disclosure to be made in connection therewith until after the expiration of the 180-day restricted period), in each case other than the shares of common stock to be sold by the undersigned pursuant to the underwriting agreement or any transfer in connection with, and as contemplated by, the Reorganization Transactions. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our Company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event, as applicable, unless each of the Representatives waives, in writing, such

 

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extension. The restrictions described in this paragraph do not apply to (i) the transfer of shares of common stock as a bona fide gift, to any beneficiary pursuant to a will, other testamentary document or applicable laws of descent or to a family member or trust, provided that, in each case, (x) the transferee agrees to be bound in writing by the terms of the lock-up agreement prior to such transfer, (y) no filing by any party (donor, donee, transferor or transferee) under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of shares of common stock shall be required or shall be voluntarily made in connection with such transfer (other than a filing on Form 5 made when required) and (z) such disposition is not made for value, (ii) transfers by a corporation, partnership or limited liability company subject to the lock-up to any wholly-owned subsidiary of such entity or to the partners, members, stockholders or affiliates of such entity, or to a charitable or family trust, provided that (x) each donee, transferee or distributee shall sign and deliver a lock-up agreement prior to such transfer, (y) no filing by any party under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made reporting a reduction in beneficial ownership of shares of common stock in connection with such transfer (other than a filing on Form 5 made when required, and in the case of the CI Partnerships (or any direct or indirect partner thereof) a filing on Form 4 may be made during the 180-day restricted period if such person provides at least two business days notice prior to such proposed filing) and (z) such disposition is not made for value, (iii) the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act, for the transfer of shares of common stock, provided that such plan does not provide for the transfer of common stock during the restricted period and (iv) the disposition of shares to the Company in connection with the exercise of incentive stock options.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

We will apply to have our common stock approved for listing on the NYSE under the symbol “PGEM.” Listing will be subject to our fulfilling all of the listing requirements of the NYSE, including the corporate governance standards applicable to controlled companies.

In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the Representatives

 

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purchase common stock in the open market in stabilizing transactions or to cover short sales, the Representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

These activities, as well as other purchases by the underwriters for their own accounts, may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NYSE, in the over-the-counter market or otherwise.

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the Representatives. In determining the initial public offering price, we and the Representatives expect to consider a number of factors including:

 

 

the information set forth in this prospectus and otherwise available to the Representatives;

 

 

our prospects and the history and prospects for the industry in which we compete;

 

 

an assessment of our management;

 

 

our prospects for future earnings;

 

 

the general condition of the securities markets at the time of this offering;

 

 

the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

 

other factors deemed relevant by the underwriters and us.

Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

 

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Each underwriter has represented and agreed that:

(i)  it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to the issuer; and

(ii)  it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), an offer of securities described in this prospectus will not be offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to the common stock that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of shares of common stock may be made to the public in that Relevant Member State at any time:

 

 

to any legal entity that is a qualified investor as defined in the Prospectus Directive;

 

 

to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amendment Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the manager for any such offer; or

 

 

in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3(2) of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of securities to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe to the common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any

 

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person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

The shares of common stock may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, the Company or the shares of common stock have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares of common stock will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of shares of common stock has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares of common stock.

 

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Other relationships

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities.

Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In particular, certain of the underwriters or their affiliates, including JPMorgan Chase Bank, N.A., UBS Loan Finance LLC, Credit Suisse AG, Cayman Islands Branch, and Goldman, Sachs & Co., are agents and/or lenders under our ABL Facility. Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co., UBS Securities LLC and/or their affiliates hold a position in the 8.25% Senior Secured Notes, and Deutsche Bank Securities Inc., Goldman, Sachs & Co. and UBS Securities LLC and/or their affiliates hold a position in the 9.375% Senior Notes. As a result of being lenders under the ABL Facility or holders of the 8.25% Senior Secured Notes and/or the 9.375% Senior Notes, such underwriters and/or their affiliates will receive a portion of the net proceeds of this offering. Credit Suisse Securities (USA) LLC, UBS Securities LLC and Stephens Inc. acted as initial purchasers in connection with the issuance of the 8.25% Senior Secured Notes in February 2011, J.P. Morgan Securities LLC acted as initial purchaser in connection with the issuance of the Senior Tack-On Notes in February 2012, UBS Securities LLC and J.P. Morgan Securities LLC acted as initial purchasers in connection with the issuance of the 9.375% Senior Notes in September 2012. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future. In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

We have engaged Solebury Capital LLC (“Solebury”) to provide certain financial consulting services (which do not include underwriting services) in connection with this offering. We agreed to pay Solebury, only upon successful completion of this offering, a fee of $550,000 and reimbursement of reasonable out-of-pocket expenses up to $25,000, plus an incentive fee of up to $75,000 payable at our sole discretion. Solebury is not acting as an underwriter in connection with this offering, and accordingly, Solebury is neither purchasing shares nor offering shares to the public in connection with this offering.

 

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Legal matters

Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, New York, will pass on the validity of the common stock offered by this prospectus for us. Paul, Weiss, Rifkind, Wharton & Garrison LLP has represented CI Capital Partners and its related parties from time to time. Certain members of Paul, Weiss, Rifkind, Wharton & Garrison LLP have made investments in Ply Gem Prime and the CI Partnerships. The underwriters are being represented by Cravath, Swaine  & Moore LLP, New York, New York.

Experts

The consolidated financial statements and schedule of Ply Gem Holdings, Inc. and subsidiaries at December 31, 2012 and December 31, 2011, and for each of the three years in the period ended December 31, 2012, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

Where you can find more information

We are subject to the informational requirements of the Exchange Act and file annual, quarterly and current reports and other information with the SEC. We have also filed with the SEC a registration statement on Form S-1 with respect to the common stock being sold in this offering. This prospectus constitutes a part of that registration statement. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules to the registration statement because some parts have been omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and our common stock being sold in this offering, you should refer to the registration statement and the exhibits and schedule filed as part of the registration statement. Statements contained in this prospectus regarding the contents of any agreement, contract or other document referred to are not necessarily complete. Reference is made in each instance to the copy of the contract or document filed as an exhibit to the registration statement. You may inspect a copy of the registration statement without charge at the SEC’s principal office in Washington, D.C. Copies of all or any part of the registration statement may be obtained after payment of fees prescribed by the SEC from the SEC’s Public Reference Room at the SEC’s principal office, at 100 F Street, N.E., Washington, D.C. 20549.

You may obtain information regarding the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC’s website address is www.sec.gov.

 

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Index to financial statements

 

Audited consolidated financial statements    Page  

Report of independent registered public accounting firm

     F-2   

Consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010

     F-3   

Consolidated statements of comprehensive (loss) income for the years ended December 31, 2012, 2011 and 2010

     F-4   

Consolidated balance sheets as of December 31, 2012 and 2011

     F-5   

Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010

     F-6   

Consolidated statements of stockholder’s equity (deficit) for the years ended December  31, 2012, 2011 and 2010

     F-7   

Notes to consolidated financial statements

     F-8   
Unaudited condensed consolidated financial statements       

Condensed consolidated statements of operations and comprehensive loss for the three months ended March 30, 2013 and March 31, 2012

     F-63   

Condensed consolidated balance sheets as of March 30, 2013 and December 31, 2012

     F-64   

Condensed consolidated statements of cash flows for the three months ended March 30, 2013 and March 31, 2012

     F-65   

Notes to unaudited condensed consolidated financial statements

     F-66   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

of Ply Gem Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Ply Gem Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive (loss) income, stockholder’s equity (deficit), and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ply Gem Holdings, Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Raleigh, North Carolina

March 15, 2013, except for

Note 1 — Earnings (loss)

per common share, as to

which the date is April 5, 2013

 

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Ply Gem Holdings, Inc. and subsidiaries

Consolidated statements of operations

 

      For the year ended December 31,  
(amounts in thousands (except per share data))    2012     2011     2010  

 

 

Net sales

   $ 1,121,301      $ 1,034,857      $ 995,906   

Cost of products sold

     877,102        824,325        779,946   
  

 

 

 

Gross profit

     244,199        210,532        215,960   

Operating expenses:

      

Selling, general and administrative expenses

     147,242        138,912        130,460   

Amortization of intangible assets

     26,937        26,689        27,099   

Write-off of previously capitalized offering costs

                   1,571   
  

 

 

 

Total operating expenses

     174,179        165,601        159,130   
  

 

 

 

Operating earnings

     70,020        44,931        56,830   

Foreign currency gain

     409        492        510   

Interest expense

     (103,133     (101,488     (122,992

Interest income

     91        104        159   

Gain (loss) on modification or extinguishment of debt

     (3,607     (27,863     98,187   
  

 

 

 

Income (loss) before provision for income taxes

     (36,220     (83,824     32,694   

Provision for income taxes

     2,835        683        5,027   
  

 

 

 

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667   
  

 

 

 

Net earnings (loss) per common share:

      

Basic and diluted net income (loss) attributable to common stockholders per common share:

   $ (390,550   $ (845,070   $ 276,670   
  

 

 

 

Weighted average common shares outstanding

     100        100        100   
  

 

 

 

Pro forma earnings (loss) per common share (unaudited):

      

Pro forma basic earnings (loss) per common share

   $         
  

 

 

     

Pro forma basic weighted average common shares outstanding

      
  

 

 

     

Pro forma diluted earnings (loss) per common share

   $         
  

 

 

     

Pro forma diluted weighted average common shares outstanding

      

 

 

See accompanying notes to consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Consolidated statements of comprehensive (loss) income

 

      For the Year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Net (loss) income

   $ (39,055   $ (84,507   $ 27,667   

Other comprehensive (loss) income, net of tax:

      

Currency translation

     835        (691     1,639   

Minimum pension liability for actuarial loss, net of tax

     (1,103     (6,600     (740
  

 

 

 

Other comprehensive (loss) income

     (268     (7,291     899   
  

 

 

 

Comprehensive (loss) income

   $ (39,323   $ (91,798   $ 28,566   

 

 

See accompanying notes to consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Consolidated balance sheets

 

(amounts in thousands (except per share data))  

December 31,

2012

   

December 31,

2011

 

 

 
ASSETS    

Current Assets:

   

Cash and cash equivalents

  $ 27,194      $ 11,700   

Accounts receivable, less allowances of $3,584 and $3,883, respectively

    115,052        109,515   

Inventories:

   

Raw materials

    39,952        41,909   

Work in process

    20,931        24,286   

Finished goods

    39,409        38,610   
 

 

 

 

Total inventory

    100,292        104,805   

Prepaid expenses and other current assets

    15,384        13,272   

Deferred income taxes

    5,172        5,675   
 

 

 

 

Total current assets

    263,094        244,967   

Property and Equipment, at cost:

   

Land

    3,737        3,737   

Buildings and improvements

    37,941        36,588   

Machinery and equipment

    293,275        272,120   
 

 

 

 

Total property and equipment

    334,953        312,445   

Less accumulated depreciation

    (235,848     (212,600
 

 

 

 

Total property and equipment, net

    99,105        99,845   

Other Assets:

   

Intangible assets, net

    94,356        121,148   

Goodwill

    392,455        391,467   

Deferred income taxes

    2,981        3,121   

Other

    29,859        32,364   
 

 

 

 

Total other assets

    519,651        548,100   
 

 

 

 
  $ 881,850      $ 892,912   
 

 

 

 
LIABILITIES AND STOCKHOLDER’S DEFICIT    

Current Liabilities:

   

Accounts payable

  $ 67,797      $ 50,090   

Accrued expenses

    93,918        90,881   
 

 

 

 

Total current liabilities

    161,715        140,971   

Deferred income taxes

    10,049        9,865   

Other long-term liabilities

    60,644        57,728   

Long-term debt

    964,384        961,670   

Commitments and contingencies

   

Stockholder’s Deficit:

   

Preferred stock $0.01 par, 100 shares authorized, none issued and outstanding

             

Common stock $0.01 par, 100 shares authorized, issued and outstanding

             

Additional paid-in-capital

    311,034        309,331   

Accumulated deficit

    (619,640     (580,585

Accumulated other comprehensive loss

    (6,336     (6,068
 

 

 

 

Total stockholder’s deficit

    (314,942     (277,322
 

 

 

 
  $ 881,850      $ 892,912   

 

 

See accompanying notes to consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Consolidated statements of cash flows

 

     For the year ended December 31,  
(amounts in thousands)   2012     2011     2010  

 

 

Cash flows from operating activities:

     

Net income (loss)

  $ (39,055   $ (84,507   $ 27,667   

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

     

Depreciation and amortization expense

    52,277        54,020        60,718   

Non-cash interest expense, net

    11,428        10,518        9,800   

Gain on foreign currency transactions

    (409     (492     (510

(Gain) loss on modification or extinguishment of debt

    3,607        27,863        (98,187

Write-off of previously capitalized offering costs

                  1,571   

Stock based compensation

    1,703        430        164   

Deferred income taxes

    1,027        6,293        1,603   

Reduction in tax uncertainty, net of valuation allowance

    (92     (6,617       

Other

    (37     (484     (168

Changes in operating assets and liabilities:

     

Accounts receivable, net

    (5,377     (13,266     (3,023

Inventories

    4,696        (6,413     (120

Prepaid expenses and other assets

    (2,534     (1,948     7,624   

Accounts payable

    17,606        (4,772     1,917   

Accrued expenses

    4,592        15,314        452   

Cash payments on restructuring liabilities

    (1,177     (407     (2,630

Other

    449        1,009        (130
 

 

 

 

Net cash provided by (used in) operating activities

    48,704        (3,459     6,748   

Cash flows from investing activities:

     

Capital expenditures

    (24,646     (11,490     (11,105

Proceeds from sale of assets

    193        102        2,032   

Acquisitions, net of cash acquired

    (100              
 

 

 

 

Net cash used in investing activities

    (24,553     (11,388     (9,073

Cash flows from financing activities:

     

Proceeds from long-term debt

    102,991        423,684        145,709   

Payments on long-term debt

    (58,991     (348,684     (141,191

Net revolver borrowings (payments)

    (40,000     55,000        5,000   

Payments on previous revolver credit facility

           (30,000       

Payment of early tender premium

    (9,844     (49,769       

Equity contributions

                  2,428   

Equity repurchases

           (14,049     (2,978

Debt issuance costs paid

    (2,969     (26,984     (5,029

Tax payments on behalf of parent

                  (1,532
 

 

 

 

Net cash provided by (used in) financing activities

    (8,813     9,198        2,407   

Impact of exchange rate movements on cash

    156        (149     353   
 

 

 

 

Net increase (decrease) in cash and cash equivalents

    15,494        (5,798     435   

Cash and cash equivalents at the beginning of the period

    11,700        17,498        17,063   
 

 

 

 

Cash and cash equivalents at the end of the period

  $ 27,194      $ 11,700      $ 17,498   
 

 

 

 

Supplemental information

     

Interest paid

  $ 95,406      $ 90,867      $ 113,032   

Income taxes paid (received), net

  $ 307      $ 3,937      $ (4,857

 

 

See accompanying notes to consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Consolidated statements of stockholder’s equity (deficit)

 

(amounts in thousands)   Additional
paid in
capital
    Accumulated
deficit
    Accumulated
other
comprehensive
income (loss)
    Total
stockholder’s
(deficit)
 

 

 

Balance, December 31, 2009

  $ 209,939      $ (523,745   $ 324      $ (313,482

Comprehensive income:

       

Net income

           27,667               27,667   

Currency translation

                  1,639        1,639   

Minimum pension liability for actuarial loss, net of tax

                  (740     (740
       

 

 

 

Total comprehensive income

          28,566   
       

 

 

 

Non-cash equity contribution by affiliate

    114,929                      114,929   

Contributions and repurchase of equity, net

    (550                   (550

Tax payment on behalf of parent

    (1,532                   (1,532

Repurchase of former employee equity

    (1,183                   (1,183

Stock compensation

    164                      164   
 

 

 

 

Balance, December 31, 2010

  $ 321,767      $ (496,078   $ 1,223      $ (173,088
 

 

 

 

Comprehensive loss:

       

Net loss

           (84,507            (84,507

Currency translation

                  (691     (691

Minimum pension liability for actuarial loss, net of tax

                  (6,600     (6,600
       

 

 

 

Total comprehensive loss

          (91,798
       

 

 

 

Repurchase of equity

    (12,866                   (12,866

Stock compensation

    430                      430   
 

 

 

 

Balance, December 31, 2011

  $ 309,331      $ (580,585   $ (6,068   $ (277,322
 

 

 

 

Comprehensive loss:

       

Net loss

           (39,055            (39,055

Currency translation

                  835        835   

Minimum pension liability for actuarial loss, net of tax

                  (1,103     (1,103
       

 

 

 

Total comprehensive loss

          (39,323
       

 

 

 

Stock compensation

    1,703                      1,703   
 

 

 

 

Balance, December 31, 2012

  $ 311,034      $ (619,640   $ (6,336   $ (314,942

 

 

See accompanying notes to consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

1. Summary of significant accounting policies

Basis of presentation

Ply Gem Holdings, Inc. (“Ply Gem Holdings”) and its wholly owned subsidiaries (individually and collectively, the “Company” or “Ply Gem”) are diversified manufacturers of residential and commercial building products, operating with two segments: (i) Siding, Fencing and Stone and (ii) Windows and Doors. Through these segments, Ply Gem Industries, Inc. (“Ply Gem Industries”) manufactures and sells, primarily in the United States and Canada, a wide variety of products for the residential and commercial construction, manufactured housing, and remodeling and renovation markets.

Ply Gem Holdings was incorporated as a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), on January 23, 2004 by affiliates of CI Capital Partners LLC (“CI Capital Partners”) for the purpose of acquiring Ply Gem Industries from Nortek, Inc. (“Nortek”). On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”), with Ply Gem Prime being the surviving corporation. As a result, Ply Gem Holdings is now a wholly owned subsidiary of Ply Gem Prime.

The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings, an affiliate of CI Capital Partners pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC dated as of December 19, 2003, as amended. Prior to February 12, 2004, the date of the Ply Gem acquisition, Ply Gem Holdings had no operations and Ply Gem Industries was wholly owned by a subsidiary of WDS LLC, which was a wholly owned subsidiary of Nortek. As a result of the Ply Gem acquisition, the Company applied purchase accounting on February 12, 2004. The Company’s acquisition history is summarized below:

 

 

On August 27, 2004, Ply Gem Industries acquired all of the outstanding shares of capital stock of MWM Holding, Inc., (“MWM Holding”), in accordance with a stock purchase agreement entered into among Ply Gem Industries, MWM Holding and the selling stockholders.

 

 

On February 24, 2006, Ply Gem Industries acquired all of the outstanding shares of capital stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC Holding Company (“AWC”, and together with its subsidiaries, “Alenco”), in accordance with a securities purchase agreement entered into among Ply Gem, all of the direct and indirect stockholders, warrant holders and stock options holders of AWC and FNL Management Corp, an Ohio corporation, as their representative. Pursuant to the securities purchase agreement, Ply Gem purchased all of the issued and outstanding shares of common stock, warrants to purchase shares of common stock and options to purchase shares of common stock of AWC (other than certain shares of common stock of AWC held by certain members of the senior management of Alenco that were contributed separately to Ply Gem Prime, the new parent company of Ply Gem Investment Holdings, in exchange for shares of capital stock of Ply Gem Prime). Immediately following the completion of the Alenco acquisition, AWC became a wholly owned subsidiary of Ply Gem.

 

 

On October 31, 2006, Ply Gem Industries acquired all of the issued and outstanding shares of common stock of Mastic Home Exteriors, Inc. (formerly known as Alcoa Home Exteriors) (“MHE”), in accordance with a stock purchase agreement entered into among Ply Gem Industries, Alcoa Securities Corporation, and Alcoa Inc.

 

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On September 30, 2007, Ply Gem Industries completed the acquisition of CertainTeed Corporation’s vinyl window and patio door business through a stock acquisition. On the acquisition date, the Company changed the name of the acquired business to Ply Gem Pacific Windows Corporation (“Pacific Windows”).

 

 

On October 31, 2008, Ply Gem Industries acquired substantially all of the assets of Ply Gem Stone (formerly United Stone Veneer).

 

 

On July 30, 2012, Ply Gem acquired substantially all of the assets of Greendeck Products, LLC, a composite products development company.

Ply Gem is a diversified manufacturer of residential and commercial building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets. The demand for the Company’s products is seasonal, particularly in the Northeast and Midwest regions of the United States and Western Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors. The Company’s sales are usually lower during the first and fourth quarters.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.

Reclassifications and retrospective application of comprehensive income guidance

Certain amounts in the prior fiscal years have been reclassified to conform to the presentation adopted in the current fiscal year, with no effect on net income (loss) or accumulated deficit. The financial statements include the consolidated statements of comprehensive income (loss) as required by new accounting guidance, which was retrospectively adopted during 2012.

Accounting policies and use of estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable. Such estimates include the allowance for doubtful accounts receivable, rebates, pensions, valuation reserve for inventories, warranty reserves, insurance reserves, legal contingencies, assumptions used in the calculation of income taxes, projected cash flows used in the goodwill and intangible asset impairment tests, and environmental accruals and other contingencies. These judgments are based on the Company’s historical experience, current trends and information available from other sources, as appropriate

 

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and are based on management’s best estimates and judgments. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and the depressed housing and remodeling market have combined to increase the uncertainty inherent in such estimates and assumptions. If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.

Recognition of sales and related costs, incentives and allowances

The Company recognizes sales upon the shipment of products, net of applicable provisions for discounts and allowances. Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period. The Company records periodic estimates for these amounts based upon the historical results to date, estimated future results through the end of the contract period and the contractual provisions of the customer agreements. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. The Company also provides for estimates of warranty and shipping costs at the time of sale. Shipping and warranty costs are included in cost of products sold. Bad debt provisions are included in selling, general and administrative expenses. The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that are expected to impact the historical analysis such as new product introduction for warranty and bankruptcies of particular customers for bad debt.

Cash equivalents

Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less which are readily convertible into cash.

Accounts receivable

Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts was $3.6 million and $3.9 million at December 31, 2012 and 2011, respectively. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, the financial health of its customers, unusual macroeconomic conditions and historical experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible trade accounts receivable

 

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against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded. During the year ended December 31, 2011, the Company reclassified approximately $1.4 million from accounts receivable to a note receivable, which is classified as other assets in the accompanying consolidated balance sheets. As of December 31, 2012 and 2011, the balance of the note receivable was $0.6 million and $0.7 million, respectively.

Inventories

Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market and are determined primarily by the first-in, first-out (FIFO) method. The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold.

The inventory reserves were approximately $6.5 million at December 31, 2012, increasing during 2012 by $0.2 million compared to the December 31, 2011 reserve balance of approximately $6.3 million.

Property and equipment

Property and equipment are presented at cost. Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows:

 

        Buildings and improvements    10-37 years
        Machinery and equipment, including leases    3-15 years
        Leasehold improvements    Term of lease or useful life, whichever is shorter

Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations. Depreciation expense for the years ended December 31, 2012, 2011, and 2010 was approximately $25.4 million, $27.3 million, and $33.6 million, respectively.

On July 30, 2010, the Company entered into an asset purchase agreement to sell substantially all of the assets associated with the operations of its Valencia, Pennsylvania facility for $2.5 million, with $1.9 million received at closing and the remaining $0.6 million recorded as a note receivable due in July 2011. The Company recognized a loss on the sale of approximately $0.1 million, which was recorded within selling, general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2010 and the note receivable was recorded as a current asset in the consolidated balance sheet as of December 31, 2010. The note receivable was collected during 2011.

Intangible assets, goodwill and other long-lived assets

Long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The

 

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Company performs undiscounted operating cash flow analyses to determine if impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flow.

The Company tests for long-lived asset impairment at the following asset group levels: i) Siding, Fencing and Stone (“Siding”), ii) the combined US Windows companies in the Windows and Doors segment (“US Windows”), and iii) Ply Gem Canada in the Windows and Doors segment. For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities. During the year ended December 31, 2011, the Company incurred an asset impairment charge of approximately $0.2 million related to a specific asset in the Windows and Doors segment that was no longer utilized.

Goodwill

Purchase accounting involves judgment with respect to the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill. For significant acquisitions, the Company values items such as property and equipment and acquired intangibles based upon appraisals.

The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant. All other intangible assets are amortized over their estimated useful lives. The Company assesses goodwill for impairment at the November month end each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies. A significant reduction in projected sales and earnings which would lead to a reduction in future cash flows could indicate potential impairment. Refer to Note 2 for additional considerations regarding the results of the impairment test in 2012 and 2011.

Debt issuance costs

Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt, are amortized over the contractual term of the related agreement using the effective interest method. Net debt issuance costs totaled approximately $23.6 million and $26.5 million as of December 31, 2012 and December 31, 2011, respectively, and have been recorded in other long term assets in the accompanying consolidated balance sheets.

Share based compensation

Share-based compensation cost for the Company’s stock option plan is measured at the grant date, based on the estimated fair value of the award, and is recognized over the requisite service period. The fair value of each option award is estimated on the grant date using a Black-Scholes option valuation model. Expected volatility is based on a review of several market indicators, including peer companies. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option.

 

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Insurance liabilities

The Company is self-insured for certain casualty losses and medical liabilities. The Company records insurance liabilities and related expenses for health, workers’ compensation, product and general liability losses and other insurance expenses in accordance with either the contractual terms of their policies or, if self-insured, the total liabilities that are estimable and probable as of the reporting date. Insurance liabilities are recorded as current liabilities to the extent they are expected to be paid in the succeeding year with the remaining requirements classified as long-term liabilities. The accounting for self-insured plans requires that significant judgments and estimates be made both with respect to the future liabilities to be paid for known claims and incurred but not reported claims as of the reporting date. The Company relies on historical trends when determining the appropriate incurred but not reported claims and health insurance reserves to record in its consolidated balance sheets. In certain cases where partial insurance coverage exists, the Company must estimate the portion of the liability that will be covered by existing insurance policies to arrive at the net expected liability to the Company.

Income taxes

The Company utilizes the asset and liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. Subsequent to February 12, 2004, U.S. federal income tax returns are prepared and filed by Ply Gem Investment Holdings, Inc. on behalf of itself, Ply Gem Holdings, and Ply Gem Industries and its subsidiaries. The existing tax sharing agreement between Ply Gem Holdings and Ply Gem Investment Holdings under which tax liabilities for each respective party are computed on a stand-alone basis, was amended to include Ply Gem Prime Holdings during 2010. U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns. Ply Gem Canada files separate Canadian income tax returns.

Sales taxes

Sales taxes collected from customers are recorded as liabilities until remitted to taxing authorities and therefore are not reflected in the consolidated statements of operations.

Commitments and contingencies

The Company provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been

 

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incurred and the amount of such liability can be reasonably estimated. Costs accrued have been estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes.

Environmental

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Environmental remediation obligation accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Liquidity

The Company intends to fund its ongoing capital and working capital requirements, including its internal growth, through a combination of cash flows from operations and, if necessary, from borrowings under the revolving credit portion of its senior secured asset based revolving credit facility (“ABL Facility”). As of December 31, 2012, the Company had approximately $964.4 million of indebtedness, $191.2 million of contractual availability under the ABL Facility, and approximately $113.4 million of borrowing base availability reflecting $15.0 million of ABL borrowings and approximately $6.3 million of letters of credit and priority payable reserves issued under the ABL Facility.

Because of the inherent seasonality in our business and the resulting working capital requirements, the Company’s liquidity position fluctuates within a given year. The seasonal effect that creates the Company’s greatest needs has historically been experienced during the first six months of the year and the Company anticipates borrowing funds under its ABL Facility to support this requirement. However, the Company anticipates the funds generated from operations and funds available under the ABL Facility will be adequate to finance its ongoing operational cash flow needs, capital expenditures, debt service obligations, management incentive expenses, and other fees payable under other contractual obligations for the foreseeable future.

Foreign currency

Ply Gem Canada, the Company’s Canadian subsidiary, utilizes the Canadian dollar as its functional currency. For reporting purposes, the Company translates the assets and liabilities of its foreign entity at the exchange rates in effect at year-end. Net sales and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying consolidated balance sheets.

The Company recorded a gain from foreign currency transactions of approximately $0.4 million, for the year ended December 31, 2012, and approximately $0.5 million for the years ended December 31, 2011 and 2010. As of December 31, 2012 and December 31, 2011, accumulated other comprehensive income (loss) included a currency translation adjustment of approximately $0.8 million and $(0.7) million, respectively.

 

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Concentration of credit risk

The Company’s largest customer in each year accounted for approximately 10.5%, 9.4%, and 9.0% of consolidated net sales for the years ended December 31, 2012, 2011, and 2010, respectively and 12.7% and 13.7% of outstanding accounts receivable as of December 31, 2012 and 2011, respectively.

Fair value measurement

The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

Level 3: Inputs that reflect the reporting entity’s own assumptions.

The hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

 

(amounts in thousands)   Carrying
value
    Fair value
total
   

Quoted prices
in active markets
for identical
assets

(Level 1)

    Significant
other
observable
inputs
(Level 2)
   

Significant
unobservable
inputs

(Level 3)

 

 

   

 

 

 

Description

         

Liabilities:

         

Senior Notes-9.375%

  $ 160,000      $ 170,400      $ 170,400      $           —      $           —   

Senior Secured Notes-8.25%

    840,000        907,200        907,200                 
 

 

 

 

As of December 31, 2012

  $ 1,000,000      $ 1,077,600      $ 1,077,600      $      $   
 

 

 

 

Liabilities:

         

Senior Subordinated Notes-13.125%

  $ 150,000      $ 132,188      $ 132,188      $      $   

Senior Secured Notes-8.25%

    800,000        697,000        697,000                 
 

 

 

 

As of December 31, 2011

  $ 950,000      $ 829,188      $ 829,188      $      $   

 

 

The fair value of the long-term debt instruments was determined by utilizing available market information. The carrying value of the Company’s other financial instruments approximates their fair value. Also see Note 5 for fair value disclosures of the pension assets.

 

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New accounting pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The differences in the offsetting requirements account for a significant difference in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and IFRS for certain entities. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. The implementation of this guidance is not expected to have a material impact on the Company’s disclosures.

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The standard allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar to the recently issued guidance on goodwill impairment. The standard allows companies the option to first assess qualitatively whether it is necessary to perform the quantitative impairment test. A company would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not (that is, a likelihood of more than 50 percent) that the asset is impaired. The implementation of this guidance is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

On January 1, 2012, the Company adopted an update issued by the FASB to existing guidance on the presentation of comprehensive income. This update requires the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Net income and other comprehensive income have been presented in two separate but consecutive statements for the current reporting period and prior comparative period in our consolidated financial statements. On February 5, 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the board’s redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The new requirements will take effect for public companies in interim and annual reporting periods beginning after December 15, 2012. The standard requires that companies present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. The implementation of this guidance is not expected to have a material impact on the Company’s disclosures.

 

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Comprehensive (loss) income

The components of accumulated other comprehensive (loss) income are as follows:

 

(amounts in thousands)    Foreign currency
translation
    Minimum
pension
liability
adjustments
    Accumulated
other
comprehensive
(loss) income
 

 

 

Balance at December 31, 2009

   $ 4,104      $ (3,780   $ 324   

Net current period change

     1,639        (740     899   
  

 

 

 

Balance at December 31, 2010

     5,743        (4,520     1,223   

Net current period change

     (691     (6,600     (7,291
  

 

 

 

Balance at December 31, 2011

     5,052        (11,120     (6,068

Net current period change

     835        (1,103     (268
  

 

 

 

Balance at December 31, 2012

   $ 5,887      $ (12,223   $ (6,336

 

 

Earnings (loss) per common share

The unaudited pro forma earnings (loss) per common share is being presented to give effect to the shares of Ply Gem Holdings common stock that will be issued in connection with the merger of the Company with its parent, Ply Gem Prime Holdings. In connection with the proposed initial public offering, the Company will merge with Ply Gem Prime Holdings and engage in a series of transactions that will result in the conversion of outstanding common stock and preferred stock (including the subordinated debt of its parent that will have been previously converted into preferred stock) of its parent into common equity of Ply Gem Holdings and result in a single class of outstanding common stock of Ply Gem Holdings (the “Reorganization Transactions”). In connection with the Reorganization Transactions, the outstanding options to purchase Ply Gem Prime Holdings common stock will convert into Ply Gem Holdings stock options. The pro forma weighted average common shares outstanding assume the conversion of the Ply Gem Prime Holdings outstanding common stock and preferred stock (including the subordinated debt of Ply Gem Prime Holdings that will have been previously converted into preferred stock) into shares of Ply Gem Holdings common stock upon the consummation of the Reorganization Transactions.

Basic and diluted earnings per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares outstanding. The Company had 100 shares of common stock outstanding for the years ended December 31, 2012, 2011 and 2010. In addition, all stock options and preferred stock are issued at the Ply Gem Prime level; therefore, no dilutive effect would exist at Ply Gem Holdings as these amounts have been recorded within additional paid in capital. Consequently, for purposes of calculating EPS, the Company calculated the amounts as net income (loss) divided by the 100 shares of common stock outstanding at the end of each period.

In connection with the proposed initial public offering, the Company will merge with its parent company, Ply Gem Prime Holdings, which will result in the conversion of outstanding common stock and preferred stock (including the subordinated debt of its parent that will have been previously converted into preferred stock) of its parent into Ply Gem Holdings common equity and result in a single class of outstanding common stock. In connection with the Reorganization Transactions, the outstanding options to purchase Ply Gem Prime Holdings common stock will convert into Ply Gem Holdings stock options.

 

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The unaudited pro forma earnings (loss) per common share is being presented to show the impact of the conversion of the outstanding common stock and preferred stock (including the subordinated debt of Ply Gem Prime Holdings that will have been previously converted into preferred stock) of Ply Gem Prime Holdings to Ply Gem Holdings common stock that will occur in connection with the Reorganization Transactions. The unaudited pro forma basic earnings (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the unaudited pro forma weighted average number of common shares outstanding for the period.

The unaudited pro forma diluted earnings (loss) per common share for the year ended December 31, 2010, reflects the treasury stock effect resulting from the conversion of Ply Gem Prime Holdings stock options into stock options of the Company in connection with the Reorganization Transactions. The treasury stock effect of Ply Gem Holdings stock options to be issued in connection with the Reorganization Transactions has not been included in the computation of the unaudited pro forma diluted earnings (loss) per common share for the years ended December 31, 2012 and 2011 as their effect would be anti-dilutive.

The following details the computation of the pro forma earnings (loss) per common share:

 

      For the year ended December 31,  
     2012     2011     2010  
(amounts in thousands (except per share data))    (unaudited)     (unaudited)     (unaudited)  

 

 

Net income (loss)

   $ (39,055   $ (84,507   $ 27,667   

Unaudited pro forma weighted average common share calculation:

      

Conversion of Ply Gem Prime Holdings common stock

      

Conversion of Ply Gem Prime Holdings preferred stock

      

Unaudited basic pro forma weighted average shares outstanding

      

Treasury stock effect of outstanding stock options

      

Unaudited diluted pro forma weighted average shares outstanding

      

Pro forma earnings (loss) per common share:

      

Pro forma basic earnings (loss) per common share

      

Pro forma diluted earnings (loss) per common share

      

 

 

2. Goodwill

The Company records the excess of purchase price over the fair value of the net assets of acquired companies as goodwill or other identifiable intangible assets. The Company performs an annual test for goodwill impairment at the November month end each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level. The Company has two reporting units: 1) Siding, Fencing and Stone and 2) Windows and Doors. Separate valuations are performed for each of these reporting units in order to test for impairment.

 

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The Company uses the two-step method to determine goodwill impairment. If the carrying amount of a reporting unit exceeds its fair value (“Step One”), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill. The Company has elected not to utilize the qualitative Step Zero impairment assessment.

To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies. The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate. The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples. These comparable public company multiples are then applied to the reporting unit’s financial performance. The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable. Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.

The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples. In order to accurately forecast future cash flows, the Company estimated single family housing starts and the repair and remodeling market’s growth rate through 2021. These assumptions modeled information published by the National Association of Home Builders (“NAHB”). The Company estimated single family housing starts increasing from 2012 levels (535,000) to approximately 1,050,000 in 2021 (terminal growth year) and estimated the repair and remodeling growth rate at approximately 3.0% in each year through 2021. The 1,050,000 terminal housing starts figure represents a historical average that tracks domestic population growth. The forecasted sales growth and operating earnings increases coincided with the growth in these two key assumptions. The Company utilized its weighted average cost of capital and its long-term growth rate to derive the appropriate capitalization rate used in the terminal value calculation. The Company utilized these fair value estimate assumptions during the impairment analysis conducted during the years ended December 31, 2012 and 2011.

The Company’s annual goodwill impairment tests performed as of November 24, 2012 and November 26, 2011 indicated no impairment. The Windows and Doors and Siding, Fencing and Stone reporting units exceeded their 2012 carrying values by approximately 69% and 219%, respectively.

The Company provides no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods. The Company will also continue to evaluate goodwill during future periods and further declines in the residential housing and remodeling markets could result in future goodwill impairments.

 

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The reporting unit goodwill balances were as follows as of December 31, 2012 and December 31, 2011:

 

(amounts in thousands)    December 31, 2012      December 31, 2011  

 

 

Siding, Fencing and Stone

   $ 320,984       $ 320,107   

Windows and Doors

     71,471         71,360   
  

 

 

 
   $ 392,455       $ 391,467   

 

 

Greendeck products acquisition

On July 30, 2012, the Company acquired substantially all of the production assets of Greendeck Products LLC (“Greendeck”) for total consideration of approximately $1.0 million consisting of cash of $0.1 million and contingent consideration fair valued at $0.9 million. Greendeck was developing an exterior building products production process. The goodwill of approximately $0.9 million arising from the acquisition consists largely of the commercialization valuation of the underlying products and economies of scale expected from combining the operations of the Company and the assets of Greendeck. The goodwill has been recorded within the Siding, Fencing and Stone segment. The Company also acquired an intangible asset in this asset purchase valued at approximately $0.1 million, which is based on a license agreement with a third party entity.

The acquisition has an earnout clause included within the asset purchase agreement. The earnout clause has been fair valued as of the acquisition date and the valuation will be updated at each reporting period. As of December 31, 2012, the fair value of the earnout is approximately $0.9 million and has been classified within other long-term liabilities in the accompanying consolidated balance sheet. There are currently no revenues or earnings from Greendeck for any comparative periods or since the date of acquisition and, consequently, no pro forma information is required or disclosed related to Greendeck.

Goodwill rollforward

A rollforward of goodwill for 2012 and 2011 is included in the table below:

 

(amounts in thousands)    Windows and
Doors
    Siding, Fencing
and Stone
 

 

 

Balance as of January 1, 2011

    

Goodwill

   $ 401,099      $ 442,334   

Accumulated impairment losses

     (327,773     (122,227
  

 

 

 
     73,326        320,107   

Currency translation adjustments

     (244       

Purchase accounting adjustment

     (307       

Tax benefit of excess tax goodwill

     (1,415       

Balance as of December 31, 2011

    

Goodwill

     399,133        442,334   

Accumulated impairment losses

     (327,773     (122,227
  

 

 

 
   $ 71,360      $ 320,107   

Currency translation adjustments

     241          

Tax benefit of excess tax goodwill

     (130       

Greendeck acquisition

            877   

Balance as of December 31, 2012

    

Goodwill

     399,244        443,211   

Accumulated impairment losses

     (327,773     (122,227
  

 

 

 
   $ 71,471      $ 320,984   

 

 

 

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During the year ended December 31, 2012, the Windows and Doors goodwill increase was primarily attributed to $0.2 million of foreign currency movement and the Siding, Fencing and Stone goodwill increase of $0.9 million was due to the Greendeck acquisition. During the year ended December 31, 2011, the Windows and Doors’ goodwill decrease was attributed to: 1) foreign currency movement $(0.2) million, 2) a purchase accounting adjustment related to a previous acquisition $(0.3) million for a reduction in accrued expenses, and 3) a tax adjustment $(1.4) million resulting from the original Ply Gem acquisition reducing deferred tax liabilities and goodwill.

3. Intangible assets

The table that follows presents the major components of intangible assets as of December 31, 2012 and 2011:

 

(amounts in thousands)   

Average
amortization
period

(in years)

   Cost      Accumulated
amortization
    Net carrying
value
 

 

 

As of December 31, 2012:

          

Patents

   14    $ 12,770       $ (8,308   $ 4,462   

Trademarks/Tradenames

   11      85,669         (61,737     23,932   

Customer relationships

   13      158,158         (93,025     65,133   

Other

        2,647         (1,818     829   
     

 

 

 

Total intangible assets

   13    $ 259,244       $ (164,888   $ 94,356   

As of December 31, 2011:

          

Patents

   14    $ 12,770       $ (7,361   $ 5,409   

Trademarks/Tradenames

   11      85,644         (48,296     37,348   

Customer relationships

   13      158,158         (80,851     77,307   

Other

        2,503         (1,419     1,084   
     

 

 

 

Total intangible assets

   13    $ 259,075       $ (137,927   $ 121,148   

 

 

Amortization expense related to these intangible assets for the years ended December 31, 2012, 2011, and 2010 was approximately $26.9 million, $26.7 million, and $27.1 million, respectively. Estimated amortization expense for the fiscal years 2013 through 2017 is shown in the following table:

 

(amounts in thousands)    Amortization expense  

 

 

2013

   $ 16,677   

2014

     15,248   

2015

     14,799   

2016

     14,156   

2017

     10,420   

 

 

During the year ended December 31, 2010, the Company decreased the remaining useful life of certain trademarks in the Windows and Doors segment to three years (applied prospectively) as a result of future marketing plans regarding the use of these trademarks. For each of the years ended December 31, 2012, December 31, 2011, and December 31, 2010, the Company incurred

 

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approximately $7.4 million of increased amortization expense compared to the year ended December 31, 2009, primarily as a result of this decrease in useful life. As of December 31, 2012 these specific trademarks are fully amortized.

4. Long-term debt

Long-term debt in the accompanying consolidated balance sheets at December 31, 2012 and 2011 consists of the following:

 

(amounts in thousands)    December 31,
2012
     December 31,
2011
 

 

 

Senior secured asset based revolving credit facility

   $ 15,000       $ 55,000   

8.25% Senior secured notes due 2018, net of unamortized early tender premium and discount of $40,870 and $40,641

     799,130         759,359   

13.125% Senior subordinated notes due 2014, net of unamortized discount of $0 and $2,689

             147,311   

9.375% Senior notes due 2017, net of unamortized discount of $9,746 and $0

     150,254           
  

 

 

    

 

 

 
   $ 964,384       $ 961,670   

 

 

2012 developments

On September 27, 2012, Ply Gem Industries completed an offering for $160.0 million aggregate principal amount of 9.375% Senior Notes due 2017 (the “9.375% Senior Notes”). The net proceeds of this offering, together with cash on hand, were deposited with the trustee for Ply Gem Industries’ 13.125% Senior Subordinated Notes due 2014 (the “13.125% Senior Subordinated Notes”) to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017.

On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction (“Senior Tack-on Notes”). The net proceeds of approximately $32.7 million after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will be utilized for general corporate purposes. The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes.

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par. Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses. A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes due 2018 given that the 2011 transaction was predominately accounted for as a loan modification. The 8.25% Senior Secured Notes due 2018 together with the Senior Tack-on Notes (“8.25% Senior Secured Notes”) will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum. Interest will be paid semi-annually on February 15 and August 15 of each year.

 

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Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the original aggregate principal amount of the 8.25% Senior Secured Notes remains outstanding after the redemption. In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to the greater of (i) $84.0 million of the 8.25% Senior Secured Notes and (ii) 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the aggregate amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any. At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”). The indenture governing the 8.25% Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt in limited circumstances as defined in the indentures) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing our obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

 

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In addition, the Company’s stock ownership in the Company’s subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission (“SEC”).

On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes. Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act. However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

11.75% Senior Secured Notes due 2013

On June 9, 2008, Ply Gem Industries issued $700.0 million of 11.75% Senior Secured Notes due 2013 (“11.75% Senior Secured Notes”) at an approximate 1.0% discount, yielding proceeds of approximately $693.5 million. Interest was paid semi-annually on June 15, 2013 and December 15 of each year. On October 23, 2009, Ply Gem Industries issued an additional $25.0 million of its 11.75% Senior Secured Notes in a private placement transaction. The additional $25.0 million of 11.75% Senior Secured Notes had the same terms and covenants as the initial $700.0 million of 11.75% Senior Secured Notes.

On February 11, 2011, the Company purchased approximately $718.6 million principal amount of the 11.75% Senior Secured Notes in a tender offer at a price of $1,069.00 per $1,000 principal amount, which included an early tender payment of $40.00 per $1,000 principal amount, plus accrued and unpaid interest, and on February 28, 2011, the Company purchased $6.0 million principal amount of the 11.75% Senior Secured Notes in the tender offer at a price of $1,029.00 per $1,000 principal amount, plus accrued and unpaid interest. On March 13, 2011, pursuant to the terms of the indenture governing the 11.75% Senior Secured Notes, the Company redeemed the remaining approximate $0.4 million at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest. As a result of these transactions, the Company paid cumulative early tender premiums of approximately $49.8 million during the year ended December 31, 2011. Following the redemption on March 13, 2011, there were no longer any 11.75% Senior Secured Notes outstanding. The 11.75% Senior Secured Notes would have matured on June 15, 2013 and bore interest at the rate of 11.75% per annum. The loss recorded as a result of this purchase is discussed in detail in the section “Gain (loss) on debt extinguishment” below.

Senior Secured Asset Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility. Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013. The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In

 

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August 2011, the Company exercised the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the Company’s ABL Facility from $175.0 million to $212.5 million. Under the terms of the ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0 million. Under the amended ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada. All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans. The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high). Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility. As of December 31, 2012, the Company’s interest rate on the new ABL Facility was approximately 2.5%. The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company’s excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million. The new ABL Facility also contains a cash dominion requirement if the Company’s excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February, and March).

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned domestic subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

 

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The ABL Facility contains certain covenants that limit the Company’s ability and the ability of the Company’s subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

As of December 31, 2012, Ply Gem Industries had approximately $191.2 million of contractual availability and approximately $113.4 million of borrowing base availability under the new ABL Facility, reflecting $15.0 million of borrowings outstanding and approximately $6.3 million of letters of credit and priority payables reserves.

Senior Secured Asset Based Revolving Credit Facility due 2013

Concurrently with the 11.75% Senior Secured Notes offering on June 9, 2008, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into an ABL Facility. The prior ABL Facility initially provided for revolving credit financing of up to $150.0 million, subject to borrowing base availability, with a maturity of five years (June 2013) including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In July 2009, the Company amended the prior ABL Facility to increase the available commitments by $25.0 million from $150.0 million to $175.0 million. As of December 31, 2011, there were no outstanding borrowings under the prior ABL Facility, as it was replaced with the new ABL Facility on January 26, 2011, as discussed above.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on

 

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April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption and the redemption occurs within 90 days of the date of the closing of such equity offerings. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. On or after October 15, 2015, and prior to October 15, 2016, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries’ and the Guarantors’ existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

The indenture governing the 9.375% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries’ assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt in limited circumstances) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an

 

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aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.

13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million. Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses. The interest rate on the Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest.

On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes. The loss recorded as a result of the debt transactions is discussed in the section “Gain (loss) on debt modification or extinguishment” below.

9.00% Senior Subordinated Notes due 2012

In connection with the issuance of $150.0 million of the 13.125% Senior Subordinated Notes on January 11, 2010, Ply Gem Industries redeemed approximately $141.2 million aggregate principal amount of the 9% Senior Subordinated Notes on February 16, 2010 at a redemption price of 100% of the principal amount thereof plus accrued interest. Approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by certain affiliates of the CI Partnerships were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime. Such notes were then transferred to the Company and then to Ply Gem Industries as a capital contribution and cancelled on February 12, 2010. As of December 31, 2011, there were no 9% Senior Subordinated Notes outstanding.

 

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Gain (loss) on debt modification or extinguishment

As a result of the 9.375% Senior Notes issuance and the transactions relating to the 13.125% Senior Subordinated Notes during the year ended December 31, 2012, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 13.125% Senior Subordinated Notes and the 9.375% Senior Notes to determine whether the transaction should be accounted for as a modification or an extinguishment of debt as it relates to each individual holder. The Company incurred an early call premium of approximately $9.8 million in connection with this transaction, of which approximately $8.3 million was recorded as a discount on the 9.375% Senior Notes and approximately $1.5 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012. The Company also expensed approximately $0.3 million for the unamortized discount and $0.4 million for the unamortized debt issuance costs for the 13.125% Senior Subordinated Notes as a result of this transaction for the year ended December 31, 2012. The Company also incurred approximately $2.5 million of costs associated with this transaction, of which approximately $1.1 million was recorded as debt issuance costs and approximately $1.4 million was expensed as loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2012.

As a result of the 8.25% Senior Secured Notes issuance and purchase and redemption of the 11.75% Senior Secured Notes during the year ended December 31, 2011, the Company performed an analysis to determine the proper accounting treatment for this transaction. Specifically, the Company evaluated each creditor with ownership in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes to determine whether the transaction was to be accounted for as a modification or an extinguishment of debt. The Company determined that this transaction resulted predominantly in a modification but in some instances as an extinguishment as some creditors did not participate in both the 11.75% Senior Secured Notes and 8.25% Senior Secured Notes. The Company incurred an early tender premium of approximately $49.8 million in conjunction with this transaction, of which approximately $38.9 million was recorded as a discount on the 8.25% Senior Secured Notes and approximately $10.9 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011. The Company also expensed approximately $0.8 million for the unamortized discount and $2.8 million for the unamortized debt issuance costs for the 11.75% Senior Secured Notes in this transaction for the year ended December 31, 2011. The Company also incurred approximately $25.9 million of costs associated with this transaction, of which approximately $13.6 million was recorded as debt issuance costs and approximately $12.3 million was expensed as a loss on modification or extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2011.

As a result of the ABL Facility refinancing during 2011, the Company evaluated the proper accounting treatment for the debt issuance costs associated with the prior ABL Facility and the new ABL Facility as there were certain members of the loan syndication that existed in both facilities and other members who were not participants in the new ABL Facility. Based on this evaluation, the Company expensed approximately $1.2 million of debt issuance costs as a loss on modification or extinguishment of debt and recorded approximately $2.1 million of debt issuance costs.

As a result of the $141.2 million redemption of the previous 9% Senior Subordinated Notes on February 16, 2010, the Company recognized a loss on extinguishment of debt of approximately $2.2 million related predominantly to the write-off of unamortized debt issuance costs. On

 

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February 12, 2010, as a result of the $218.8 million contribution of the 9% Senior Subordinated Notes by affiliates of the Company’s controlling stockholders in exchange for equity of Ply Gem Prime valued at approximately $114.9 million, the Company recognized a gain on extinguishment of approximately $100.4 million, including the write-off of unamortized debt issuance costs of approximately $3.5 million. The $98.2 million gain on debt extinguishment was recorded separately in the accompanying consolidated statement of operations for the year ended December 31, 2010.

Based on these financing transactions, the Company recognized a loss on debt modification or extinguishment of approximately $3.6 million and $27.9 million and a gain on debt extinguishment of approximately $98.2 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, as summarized in the table below.

 

     For the year ended  
(amounts in thousands)   December 31,
2012
    December 31,
2011
    December 31,
2010
 

 

 

Gain (loss) on extinguishment of debt:

     

Tender premium

  $      $ (10,883   $   

11.75% Senior Secured Notes unamortized discount

           (775       

11.75% Senior Secured Notes unamortized debt issuance costs

           (2,757       

13.125% Senior Subordinated Notes call premium

    (1,487              

13.125% Senior Subordinated Notes unamortized discount

    (299              

13.125% Senior Subordinated Notes unamortized debt issuance costs

    (372              
 

 

 

 
    (2,158     (14,415       

Carrying value of 9% Senior Subordinated Notes

                  360,000   

9% Senior Subordinated Notes unamortized debt issuance costs

                  (5,780

9% Senior Subordinated Notes unamortized premium

                  100   

Reacquisition price of 9% Senior Subordinated Notes

                  (256,133
 

 

 

 
                  98,187   

Loss on modification of debt:

     

Third party fees for 8.25% Senior Secured Notes

           (12,261       

Unamortized debt issuance costs for prior ABL Facility

           (1,187       

Third party fees for 9.375% Senior Notes

    (1,449              
 

 

 

 
    (1,449     (13,448       
 

 

 

 

Total gain (loss) on modification or extinguishment of debt

  $ (3,607   $ (27,863   $ 98,187   

 

 

Debt maturities

The following table summarizes the Company’s long-term debt maturities due in each fiscal year after December 31, 2012.

 

(amounts in thousands)    As of December 31, 2012  

 

 

2013

   $   

2014

       

2015

       

2016

     15,000   

2017

     150,254   

Thereafter

     799,130   
  

 

 

 
   $ 964,384   

 

 

 

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5. Defined benefit plans

The Company has two pension plans, the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc. Retirement Plan (the “MW Plan”). The plans are combined in the following discussion.

The table that follows provides a reconciliation of benefit obligations, plan assets, and funded status of the combined plans in the accompanying consolidated balance sheets at December 31, 2012 and 2011:

 

(amounts in thousands)    December 31,
2012
    December 31,
2011
 

 

 

Change in projected benefit obligation

    

Benefit obligation at beginning of year

   $ 42,400      $ 38,066   

Service cost

     101        98   

Interest cost

     1,850        1,931   

Actuarial loss

     3,066        4,138   

Benefits and expenses paid

     (2,357     (1,833
  

 

 

 

Projected benefit obligation at end of year

   $ 45,060      $ 42,400   
  

 

 

 

Change in plan assets

    

Fair value of plan assets at beginning of year

   $ 26,377      $ 26,929   

Actual return on plan assets

     3,164        (680

Employer and participant contributions

     2,596        1,961   

Benefits and expenses paid

     (2,357     (1,833
  

 

 

 

Fair value of plan assets at end of year

   $ 29,780      $ 26,377   
  

 

 

 

Funded status and financial position:

    

Fair value of plan assets

   $ 29,780      $ 26,377   

Benefit obligation at end of year

     45,060        42,400   
  

 

 

 

Funded status

   $ (15,280   $ (16,023
  

 

 

 

Amount recognized in the balance sheet consists of:

    

Current liability

   $ (1,141   $ (2,577

Noncurrent liability

     (14,139     (13,446
  

 

 

 

Liability recognized in the balance sheet

   $ (15,280   $ (16,023

 

 

The accumulated benefit obligation for the combined plans was approximately $45.1 million and $42.4 million as of December 31, 2012 and December 31, 2011, respectively.

Accumulated other comprehensive loss

Amounts recognized in accumulated other comprehensive loss at December 31, 2012 and December 31, 2011 consisted of the following:

 

(amounts in thousands)    December 31,
2012
     December 31,
2011
 

 

 

Initial net asset (obligation)

   $       $   

Prior service credit (cost)

               

Net loss

     15,468         14,365   
  

 

 

 

Accumulated other comprehensive loss

   $ 15,468       $ 14,365   

 

 

These amounts do not include any amounts recognized in accumulated other comprehensive income related to the nonqualified Supplemental Executive Retirement Plan.

 

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Actuarial assumptions

Plan assets consist of cash and cash equivalents, fixed income mutual funds, equity mutual funds, as well as other investments. The discount rate for the projected benefit obligation was chosen based upon rates of returns available for high-quality fixed-income securities as of the plan’s measurement date. The Company reviewed several bond indices, comparative data, and the plan’s anticipated cash flows to determine a single discount rate which would approximate the rate in which the obligation could be effectively settled. The expected long-term rate of return on assets is based on the Company’s historical rate of return. The weighted average rate assumptions used in determining pension costs and the projected benefit obligation for the periods indicated are as follows:

 

      For the year ended
December 31,
 
     2012      2011      2010  

 

 

Discount rate for projected benefit obligation

     4.00%         4.50%         5.30%   

Discount rate for pension costs

     4.50%         5.30%         5.95%   

Expected long-term average return on plan assets

     7.50%         7.50%         7.50%   

 

  

 

 

 

Net periodic benefit costs

The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components:

 

      For the year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Service cost

   $ 101      $ 98      $ 92   

Interest cost

     1,850        1,931        2,014   

Expected return on plan assets

     (2,008     (2,028     (1,818

Amortization of loss

     807        269        203   
  

 

 

 

Net periodic benefit expense

   $ 750      $ 270      $ 491   

 

  

 

 

 

Pension assets

The weighted-average asset allocations at December 31, 2012 by asset category are as follows:

 

      Target
allocation
     Actual
allocation as of
December 31, 2012
     Weighted average
expected long-term
rate of return (1)
 

 

 

Asset Category

        

U.S. Large Cap Funds

     25.0%         21.9%         2.0%   

U.S. Mid Cap Funds

     5.0%         8.0%         0.5%   

U.S. Small Cap Funds

     3.0%         3.2%         0.3%   

International Equity

     15.0%         14.6%         1.6%   

Fixed income

     45.0%         45.2%         2.3%   

Other investments

     7.0%         7.1%         0.6%   
  

 

 

    

 

 

 
     100.0%         100.0%         7.3%   

 

 

 

(1)   The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

 

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The weighted-average asset allocations at December 31, 2011 by asset category are as follows:

 

      Target
allocation
     Actual
allocation as of
December 31, 2011
     Weighted average
expected long-term
rate of return (1)
 

 

 

Asset Category

        

U.S. Large Cap Funds

     25.0%         21.9%         2.0%   

U.S. Mid Cap Funds

     5.0%         7.9%         0.5%   

U.S. Small Cap Funds

     3.0%         3.1%         0.3%   

International Equity

     15.0%         15.2%         1.6%   

Fixed income

     45.0%         45.0%         2.3%   

Other investments

     7.0%         6.9%         0.6%   
  

 

 

 
     100.0%         100.0%         7.3%   

 

 

 

(1)   The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

The Company has established formal investment policies for the assets associated with the Company’s pension plans. Policy objectives include maximizing long-term return at acceptable risk levels, diversifying among asset classes, if appropriate, and among investment managers, as well as establishing relevant risk parameters within each asset class. Investment policies reflect the unique circumstances of the respective plans and include requirements designed to mitigate risk including quality and diversification standards. Asset allocation targets are based on periodic asset reviews and/or risk budgeting study results which help determine the appropriate investment strategies for acceptable risk levels. The investment policies permit variances from the targets within certain parameters.

Factors such as asset class allocations, long-term rates of return (actual and expected), and results of periodic asset liability modeling studies are considered when constructing the long-term rate of return assumption for the Company’s pension plans. While historical rates of return play an important role in the analysis, the Company also considers data points from other external sources if there is a reasonable justification to do so.

The plan assets are invested to maximize returns without undue exposure to risk. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes, investment styles and investment managers. The plan’s asset allocation policies are consistent with the established investment objectives and risk tolerances. The asset allocation policies are developed by examining the historical relationships of risk and return among asset classes, and are designed to provide the highest probability of meeting or exceeding the return objectives at the lowest possible risk. The weighted average expected long-term rate of return by asset category is based on the Company’s target allocation.

 

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The following table summarizes the Company’s plan assets measured at fair value on a recurring basis (at least annually) as of December 31, 2012 and December 31, 2011:

 

(amounts in thousands)   Fair value as of
December 31,
2012
   

Quoted prices in
active markets
for identical
assets

(Level 1)

   

Significant other
observable
inputs

(Level 2)

    Significant
unobservable inputs
(Level 3)
 

 

 

Equity Securities (1)

       

U.S. Large Cap Funds

  $ 6,530      $ 6,530      $      $   

U.S. Mid Cap Funds

    2,380        1,173        1,207          

U.S. Small Cap Funds

    938        468        470          

International Funds

    4,364        4,364                 

Fixed Income

       

Domestic Bond Funds (2)

    13,460        1,520        11,940          

Other Investments

       

Commodity Funds (3)

    1,419        1,419                 

Cash & Equivalents

    689               689          
 

 

 

 
  $ 29,780      $ 15,474      $ 14,306      $  —   

 

 

 

 

   

 

 

   

 

 

   

 

 

 

 

(amounts in thousands)  

Fair value as of
December 31,

2011

   

Quoted prices in
active markets
for identical

assets

(Level 1)

   

Significant other
observable inputs

(Level 2)

   

Significant
unobservable inputs

(Level 3)

 

 

 

Equity Securities (1)

       

U.S. Large Cap Funds

  $ 5,793      $ 5,793      $      $  —   

U.S. Mid Cap Funds

    2,087        1,032        1,055          

U.S. Small Cap Funds

    812        393        419          

International Funds

    3,996        3,996                 

Fixed Income

       

Domestic Bond Funds (2)

    11,863        1,317        10,546          

Other Investments

       

Commodity Funds (3)

    1,302        1,302                 

Cash & Equivalents

    524               524          
 

 

 

   

 

 

 
  $ 26,377      $ 13,833      $ 12,544      $   

 

 

 

 

   

 

 

 

 

(1)   Equity securities are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(2)   Domestic bonds are comprised of mutual funds valued at net asset value per share multiplied by number of shares at measurement date.
(3)   Commodity funds are comprised of two mutual funds which represent small market energy funds.

The Ply Gem Plan was frozen as of December 31, 1998, and no further increases in benefits may occur as a result of increases in service or compensation and no new participants can be added to the Plan.

The MW Plan was frozen for salaried participants as of October 31, 2004, and no further increases in benefits for salaried participants may occur as a result of increases in service or compensation. The MW Plan was frozen for non-salaried participants during 2005. No additional non-salaried participants may enter the plan, but increases in benefits as a result of increases in service or compensation will still occur.

 

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Benefit plan contributions

The Company made cash contributions to the combined plans of approximately $2.6 million and $2.0 million for the years ended December 31, 2012 and 2011, respectively. During fiscal year 2013, the Company expects to make cash contributions to the combined plans of approximately $1.1 million.

Benefit plan payments

The following table shows expected benefit payments for the next five fiscal years and the aggregate five years thereafter from the combined plans. These benefit payments consist of qualified defined benefit plan payments that are made from the respective plan trusts and do not represent an immediate cash outflow to the Company.

 

Fiscal Year    Expected benefit payments  

 

 
(amounts in thousands)       

 

 

2013

   $ 1,956   

2014

     2,029   

2015

     2,111   

2016

     2,211   

2017

     2,315   

2018-2022

     13,117   

 

 

Other retirement plans

The Company also has an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees. The projected benefit obligation relating to this unfunded plan totaled approximately $349,000 and $354,000 at December 31, 2012 and 2011, respectively. The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of December 31, 2012 and 2011. Pension expense for the plan was approximately $14,000, $17,000, and $18,000 for the years ended December 31, 2012, 2011, and 2010, respectively.

6. Defined contribution plans

The Company has a defined contribution 401(k) plan covering all eligible employees. Effective September 1, 2010, the Company reinstated matching contributions after suspending the contributions on April 1, 2008. Effective with the reinstatement, the Company matched 50% of the first 6% of employee contributions for most members, with the exception of matching 25% of the first 6% of employee contributions for certain union members per a negotiated contract. The Company also has the option of making discretionary contributions. The Company contributed approximately $2.1 million for the year ended December 31, 2012, approximately $2.1 million for the year ended December 31, 2011, and $0.7 million (including forfeitures) for the year ended December 31, 2010, which has been expensed within selling, general, and administrative expense in the accompanying consolidated statement of operations.

 

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7. Commitments and contingencies

Operating leases

At December 31, 2012, the Company was obligated under lease agreements for the rental of certain real estate and machinery and equipment used in its operations. Future minimum rental obligations for non-cancellable lease payments total approximately $112.7 million at December 31, 2012. The lease obligations, partially offset by subleases, are payable as follows:

 

(amounts in thousands)    Lease
commitments
     Sublease
income
 

 

 

2013

   $ 18,861       $ 445   

2014

     17,290         454   

2015

     14,935         463   

2016

     12,033         472   

2017

     10,735         481   

Thereafter

     38,844         3,650   

 

 

Total rental expense for all operating leases amounted to approximately $26.0 million for the year ended December 31, 2012, $24.6 million for the year ended December 31, 2011, and $24.6 million for the year ended December 31, 2010.

Indemnifications

In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition. In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable. The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement. A receivable related to this indemnification has been recorded in other long-term assets in the approximate amount of $3.4 million and $3.6 million at December 31, 2012 and December 31, 2011, respectively. As of December 31, 2012 and December 31, 2011, the Company has recorded liabilities related to these indemnifications of approximately $0.4 million and $0.4 million, respectively, in current liabilities and $3.0 million and $3.2 million, respectively, in long-term liabilities, consisting of the following:

 

(amounts in thousands)    December 31,
2012
     December 31,
2011
 

 

 

Product claim liabilities

   $ 218       $ 193   

Multiemployer pension plan withdrawal liability

     2,615         2,854   

Other

     578         572   
  

 

 

 
   $ 3,411       $ 3,619   

 

  

 

 

    

 

 

 

The product claim liabilities of approximately $0.2 million at December 31, 2012 and December 31, 2011, recorded in long term liabilities, represents the estimated costs to resolve the outstanding matters related to a former subsidiary of the Company, which is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. The Company had indemnified the buyer of the former subsidiary for all known liabilities and future claims relating to such matters and retained the rights to all potential reimbursements related to insurance coverage. Many of the suits have been resolved by dismissal

 

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or settlement with amounts being paid out of insurance proceeds or other third party recoveries. The Company and the former subsidiary continue to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. The Company and the former subsidiary have engaged in coverage litigation with certain insurers and have settled coverage claims with several of the insurers.

The multiemployer pension liability of approximately $2.6 million and $2.9 million recorded in long term liabilities at December 31, 2012 and December 31, 2011, respectively, relate to liabilities assumed by the Company in 1998 when its former subsidiary, Studley Products, Inc. (“Studley”) was sold. In connection with the sale, Studley ceased making contributions to the Production Service and Sales District Council Pension Fund (the “Pension Fund”), and the Company assumed responsibility for all withdrawal liabilities to be assessed by the Pension Fund. Accordingly, the Company is making quarterly payments of approximately $0.1 million to the Pension Fund through 2018 based upon the assessment of withdrawal liability received from the Pension Fund. The multiemployer pension liability represents the present value of the quarterly payment stream as well as an estimate of additional amounts that may be assessed in the future by the Pension Fund under the contractual provisions of the Pension Fund.

Included in the indemnified items is approximately $0.4 million for each of the years ended December 31, 2012 and 2011, of accrued expenses to cover the estimated costs of known litigation claims, including the estimated cost of legal services incurred, that the Company is contesting including certain employment and former shareholder litigation related to the Company.

Warranty claims

The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. As of December 31, 2012 and 2011, warranty liabilities of approximately $8.3 million and $7.7 million, respectively, have been recorded in current liabilities and approximately $29.5 million and $30.9 million, respectively, have been recorded in long term liabilities.

Changes in the Company’s short-term and long-term warranty liabilities are as follows:

 

      For the year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Balance, beginning of period

   $ 38,612      $ 41,780      $ 43,398   

Warranty expense during period

     11,034        7,359        11,364   

Settlements made during period

     (11,776     (10,527     (12,982
  

 

 

 

Balance, end of period

   $ 37,870      $ 38,612      $ 41,780   

 

  

 

 

 

 

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Environmental

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. During 2011, as part of the Administrative Order on Consent, MW provided the EPA with a facility investigation work plan and a preliminary cost estimate of approximately $1.8 million over the remediation period, which is estimated through 2023. As a result, the Company incurred an incremental expense of approximately $1.6 million during the year and quarter ended December 31, 2011 to record an additional accrual for this preliminary cost estimate. This expense has been recognized within selling, general and administrative expenses for the year ended December 31, 2011 in the consolidated statement of operations. During December 2012, the EPA formally approved the Company’s remediation plan. The Company has recorded approximately $0.3 million and $0.5 million of this environmental liability within current liabilities and approximately $1.5 million and $1.3 million within other long-term liabilities in the Company’s consolidated balance sheet at December 31, 2012 and December 31, 2011, respectively. The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.

Certain liabilities for this contamination were previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners. As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc. The Company’s ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future. As of December 31, 2012, no recovery has been recognized on the Company’s consolidated balance sheet but the Company will actively pursue the validity of this indemnity in future periods and will recognize future recoveries in the period in which they become probable.

Self-insured risks

The Company maintains a broad range of insurance policies which include general liability insurance coverage and workers compensation. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a portion of the overall risk for such claims through its self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The Company’s general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. The Company’s insurance coverage is subject to a per occurrence retention.

The Company reserves for costs associated with claims, as well as incurred but not reported losses (“IBNR”), based on an outside actuarial analyses of its historical claims. These estimates make up a significant portion of the Company’s liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in type of claims, claims reporting and resolution patterns, frequency and timing of claims, third party recoveries, estimates of claim values, claims management expenses (including legal fees and expert fees), insurance industry practices, the regulatory environment, and legal precedent. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

 

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During 2012, the Company experienced a higher level of estimated claims management expenses, primarily due to claims discussed in “Litigation” below, which increased the Company’s estimated claim reserves by $0.4 million which has been recorded in selling, general and administrative expense in the consolidated statement of operations for the year ended December 31, 2012. Because of the inherent uncertainty in estimating future losses related to claims, actual costs could differ significantly from current estimates.

Litigation

During 2012, the Company incurred increased litigation expense primarily related to the claims discussed below. While the Company believes it has valid defenses to these claims and will vigorously defend, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.

In John Gulbankian and Robert D. Callahan v. MW Manufacturers, Inc., a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s V-Wood windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc., a purported class action filed in July 2012 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s Freedom and Freedom 800 windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Anthony Pagliaroni v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by MHE. The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The damages sought in this action have not yet been quantified. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim. Decuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify us for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. Our ability to seek indemnification from Deceuninck is, however, limited by the terms of the indemnity as well as the strength of Deceuninck’s financial condition, which could change in the future.

 

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In The Muhler Company, Inc. v. Ply Gem Prime Holdings, Inc. et al., a lawsuit filed in April 2011 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff alleges unfair competition and trade practices. The plaintiff seeks a variety of relief, including (i) consequential damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. The Company believes that it has valid defenses to this claim, and it will vigorously defend this claim.

Other contingencies

The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty and modification, adjustment or replacement of component parts of units sold, which may include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made.

8. Accrued expenses and other long-term liabilities

Accrued expenses consist of the following at December 31, 2012 and December 31, 2011:

 

(amounts in thousands)    December 31,
2012
     December 31,
2011
 

 

 

Insurance

   $ 3,499       $ 3,229   

Employee compensation and benefits

     5,745         6,270   

Sales and marketing

     23,939         23,282   

Product warranty

     8,336         7,677   

Accrued freight

     890         498   

Accrued interest

     30,465         34,183   

Accrued environmental liability

     473         708   

Accrued pension

     1,141         2,577   

Accrued sales returns and discounts

     2,201         1,782   

Accrued taxes

     3,035         2,093   

Other

     14,194         8,582   
  

 

 

    

 

 

 
   $ 93,918       $ 90,881   

 

 

 

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Other long-term liabilities consist of the following at December 31, 2012 and December 31, 2011:

 

(amounts in thousands)    December 31,
2012
     December 31,
2011
 

 

 

Insurance

   $ 1,593       $ 1,642   

Pension liabilities

     14,139         13,446   

Multi-employer pension withdrawal liability

     2,615         2,854   

Product warranty

     29,534         30,935   

Long-term product claim liability

     218         193   

Long-term environmental liability

     1,824         1,750   

Liabilities for tax uncertainties

     3,454         3,546   

Other

     7,267         3,362   
  

 

 

    

 

 

 
   $ 60,644       $ 57,728   

 

 

Long-term incentive plan

During the year ended December 31, 2011, the Company finalized a long-term incentive plan (“LTIP”) for certain employees. The long-term incentive plan was implemented to retain and incentivize employees through the downturn in the housing market. During the years ended December 31, 2012 and December 31, 2011, the Company recognized a LTIP expense of $1.9 million and $0.9 million, respectively, which has been recorded within selling, general, and administrative expenses in the consolidated statement of operations. The LTIP liability is $2.8 million and $0.9 million as of December 31, 2012 and December 31, 2011, respectively, and has been recognized as an other long-term liability in the consolidated balance sheets.

Other liabilities

During the years ended December 31, 2012, 2011 and 2010, the Company made approximately $1.2 million, $0.4 million, and $2.6 million in cash payments on restructuring liabilities, respectively. These payments were for general back office centralization efforts incurred during 2012 as well as product simplification costs incurred for the Windows and Doors segment. In addition, during the year ended December 31, 2011, the Company made $3.7 million in retention payments to certain members of management that were previously accrued within accrued expenses.

9. Restructuring

In November 2008, the Company announced the closure of its Hammonton, New Jersey and Phoenix, Arizona window and door manufacturing facilities. During December 2008, production began to shift to other locations and production ceased at Hammonton and Phoenix during 2009. By shifting production to other facilities within the Company, the closures reduced costs and increased operating efficiencies. Total costs were approximately $5.4 million, including approximately $1.0 million for personnel-related costs and approximately $4.4 million in other facilities-related costs, which include approximately $4.0 million in lease costs.

On April 2, 2009, the Company announced that it would consolidate production across several of its manufacturing facilities improving the Company’s overall operating efficiency. The Company’s plans included shifting the majority of the production from its Kearney, Missouri facility to its other three vinyl siding manufacturing facilities. The Company continued to operate the Kearney,

 

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Missouri facility on a limited basis until the housing began market recovering. The Company also closed its Tupelo, Mississippi window and door manufacturing facility. In addition, the Company consolidated certain of the vinyl lineal production to its Rocky Mount, Virginia facility and realigned production of its west coast window and door facilities at Sacramento, California and Auburn, Washington to better serve customers and improve overall operating efficiency. In connection with the April 2, 2009 announcement, the Company incurred pre-tax exit and restructuring costs, all of which were cash charges, of approximately $2.0 million, including approximately $0.9 million for personnel-related costs, approximately $0.1 million for contract termination costs, and approximately $1.0 million in other facilities-related costs.

The Company recorded restructuring costs in selling, general and administrative expenses in the years and segments shown in the following table:

 

      For the year ended
December 31,
 
(amounts in thousands)    2012      2011      2010  

 

 

Siding, Fencing and Stone

   $  —       $                 $ 112   

Windows and Doors

                     102   
  

 

 

 
   $       $                 $ 214   

 

 

The Company also recorded in its Windows and Doors segment interest expense related to lease termination costs of approximately $111,000 for the year ended December 31, 2010.

10. Income taxes

The following is a summary of the components of income (loss) before provision (benefit) for income taxes:

 

      For the year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Domestic

   $ (37,675   $ (86,538   $ 23,927   

Foreign

     1,455        2,714        8,767   
  

 

 

 
   $ (36,220   $ (83,824   $ 32,694   

 

 

 

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The following is a summary of the provision (benefit) for income taxes included in the accompanying consolidated statement of operations:

 

      For the year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Federal:

      

Current

   $      $ (6,617   $ 83   

Deferred

     835        6,640        1,331   
  

 

 

 
     835        23        1,414   
  

 

 

 

State:

      

Current

   $ 2,461      $ 654      $ 1,526   

Deferred

     (146     (847     (350
  

 

 

 
     2,315        (193     1,176   
  

 

 

 

Foreign:

      

Current

   $ (653   $ 353      $ 1,815   

Deferred

     338        500        622   
  

 

 

 
     (315     853        2,437   
  

 

 

 

Total

   $ 2,835      $ 683      $ 5,027   

 

 

The table that follows reconciles the federal statutory income tax rate to the effective tax rate of approximately 7.8% for the year ended December 31, 2012, 0.8% for the year ended December 31, 2011, and 15.4% for the year ended December 31, 2010.

 

      For the year ended
December 31,
 
(amounts in thousands)    2012     2011     2010  

 

 

Income tax provision (benefit) at the federal statutory rate

   $ (12,677   $ (29,338   $ 11,443   

Net change from statutory rate:

      

Valuation allowance

     16,073        38,939        (28,692

Federal impact of cancellation of debt income

                   17,667   

State impact of cancellation of debt income

                   2,646   

Federal net operating loss adjustment

                   2,581   

State income tax benefit, net of federal income tax benefit

     (919     (1,936     (766

Taxes at non U.S. statutory rate

     194        76        (153

Additional provisions/reversals of uncertain tax positions

     (92     (6,287     342   

Canadian rate differential

     (171     (254     (592

Other, net

     427        (517     551   
  

 

 

   

 

 

   

 

 

 
   $ 2,835      $ 683      $ 5,027   

 

  

 

 

   

 

 

   

 

 

 

 

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The tax effect of temporary differences, which gave rise to significant portions of deferred income tax assets and liabilities as of December 31, 2012 and 2011 are as follows:

 

(amounts in thousands)    December 31,
2012
    December 31,
2011
 

 

 

Deferred tax assets:

    

Accounts receivable

   $ 1,291      $ 1,397   

Insurance reserves

     1,876        1,832   

Warranty reserves

     11,937        11,668   

Pension accrual

     6,628        6,413   

Deferred compensation

     2,028        683   

Inventories

     3,474        3,100   

Federal, net operating loss carry-forwards

     80,268        76,789   

State net operating loss carry-forwards

     11,875        11,380   

Interest

     4,573        4,636   

Other assets, net

     5,780        5,172   

Valuation allowance

     (66,279     (49,780
  

 

 

 

Total deferred tax assets

     63,451        73,290   

Deferred tax liabilities:

    

Pension accrual

     (514       

Property and equipment, net

     (14,260     (17,517

Intangible assets, net

     (32,276     (39,912

Deferred financing

     (16,709     (14,995

Other liabilities, net

     (1,588     (1,935
  

 

 

 

Total deferred tax liabilities

     (65,347     (74,359
  

 

 

 

Net deferred tax liability

   $ (1,896   $ (1,069

 

 

Debt transactions

On February 16, 2012, Ply Gem issued an additional $40.0 million aggregate principal amount of 8.25% Senior Secured Notes in a private placement transaction. The notes will mature on February 15, 2018 and are secured by substantially all assets of Ply Gem Industries and the Guarantors. The Senior Tack-on Notes were issued at a discount yielding net proceeds of approximately $34.0 million, prior to debt issuance costs. As a result of the discount, the Senior Tack-on Notes are subject to the Applicable High Yield Discount Obligation rules. Consequently, no portion of the original issue discount (“OID”) will be deductible for income tax purposes in the future.

Cancellation of indebtedness

Affiliates of Ply Gem Prime’s controlling stockholders purchased approximately $281.4 million of the Company’s 9% Senior Subordinated Notes during the year ended December 31, 2009. The cumulative affiliate purchases were made at amounts below the $281.4 million face value of the 9% Senior Subordinated Notes. The Company determined that approximately $121.5 million would be considered cancellation of indebtedness income (“CODI”) for tax purposes. The Company determined that it is eligible to reduce CODI by certain tax attributes including net operating loss carry-forwards for the year ended December 31, 2009. The Company reduced certain tax attributes including net operating loss carryforwards (“NOLs”) and tax basis in certain assets in lieu of recognizing approximately $121.5 million of CODI for income tax purposes during the year ended December 31, 2009.

 

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During February 2010, approximately $218.8 million aggregate principal amount of 9% Senior Subordinated Notes held by affiliates of Ply Gem Prime’s controlling stockholders were transferred to Ply Gem Prime’s controlling stockholders and ultimately to Ply Gem Prime in exchange for equity of Ply Gem Prime valued at approximately $114.9 million. These notes were then transferred to the Company and then to Ply Gem Industries as a capital contribution and cancelled. Also during February 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million aggregate principal amount of the 9% Senior Subordinated Notes held by affiliates of Ply Gem Prime’s controlling stockholders). As a result of these debt transactions, the Company realized $35.3 million of additional CODI for income tax purposes during the year ended December 31, 2010.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”). Among its provisions, the Act permits certain taxpayers to elect to defer the taxation of CODI arising from certain repurchases, exchanges or modifications of their outstanding debt that occur during 2009 and 2010. For debt acquired in 2009, the CODI can be deferred for five years and then included in taxable income ratably over the next five years. The CODI deferral and inclusion periods for debt acquired during 2010 would be four years. If the CODI is deferred, the Company will also be required to defer the deduction of all or a substantial portion of any OID deductions. The Company does not currently plan to utilize this deferral election for the 2010 CODI.

Valuation allowance

As of December 31, 2012, a full federal valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. The Company considered the impact of reversing taxable temporary differences with regard to realization of deferred tax assets to determine the amount of valuation allowance for 2012. Due to recent cumulative losses accumulated by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. Additionally, at December 31, 2012, the Company was in a partial state valuation allowance position for certain legal entities primarily related to losses for income tax purposes.

During the year ended December 31, 2012, the Company’s federal and state valuation allowance increased by approximately $14.7 million and $1.8 million, respectively. The increase is primarily due to the current year taxable loss. The Company currently has book goodwill of approximately $18.7 million that is not amortized and results in a deferred tax liability of approximately $4.4 million at December 31, 2012. Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets. The Company continues to evaluate the realizability of its net deferred tax assets and its estimates are subject to change.

During the year ended December 31, 2011, the Company’s federal and state valuation allowances increased by approximately $40.2 million and $1.3 million, respectively. The increase is primarily due to the 2011 taxable loss. The Company currently has book goodwill of approximately $13.4 million that is not amortized and results in a deferred tax liability of approximately $3.5 million at December 31, 2011. Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a source of future taxable income in assessing the realization of its deferred tax assets.

 

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Other tax considerations

As of December 31, 2012, the Company has approximately $229.3 million of federal gross operating loss carry-forwards which can be used to offset future taxable income. These federal carry-forwards will begin to expire in 2028 if not utilized. The Company has approximately $245.8 million of gross state NOL carry-forwards and $11.9 million (net of federal benefit) of deferred tax assets related to these state NOL carry-forwards which can be used to offset future state tax liabilities. The Company has established a valuation allowance of approximately $9.1 million for the deferred tax asset associated with these state NOL carry-forwards. The Company currently has no state NOL carry-forwards that are expiring. Future tax planning strategies implemented by the Company could reduce or eliminate future NOL expiration.

As of December 31, 2012, the Company has not established U.S. deferred taxes on approximately $23.4 million of unremitted earnings of the Company’s foreign subsidiary, Ply Gem Canada. Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently invested.

On December 23, 2011, the U.S. Treasury Department issued comprehensive temporary and proposed regulations addressing the treatment of expenditures related to tangible property for tax purposes effective for tax years beginning January 1, 2014 and thereafter. The Company has begun to evaluate the changes necessary to comply with the regulations and the related administrative procedures and is not currently aware of any adjustments that would be material to the Company’s consolidated financial statements.

Tax uncertainties

The Company records reserves for certain tax uncertainties based on the likelihood of an unfavorable outcome. Of this amount, approximately $3.5 million, if recognized, would have an impact on the Company’s effective tax rate. As of December 31, 2012, the reserve was approximately $3.5 million which includes interest of approximately $0.9 million. As of December 31, 2011, the reserve was approximately $3.5 million which included interest of approximately $0.8 million.

The Company has elected to treat interest and penalties on uncertain tax positions as income tax expense in its consolidated statement of operations. Interest charges have been recorded in the contingency reserve account within other long term liabilities in the consolidated balance sheet.

The following is a rollforward of gross tax contingencies from January 1, 2011 through December 31, 2012.

 

 

 

Balance at January 1, 2011

   $  18,704   

Additions based on tax positions related to current year

     274   

Additions for tax positions of prior years

       

Reductions for tax positions of prior years

       

Settlement or lapse of applicable statutes

     (6,268
  

 

 

 

Unrecognized tax benefits balance at December 31, 2011

     12,710   

Additions based on tax positions related to current year

     604   

Additions for tax positions of prior years

     1,033   

Reductions for tax positions of prior years

     (545

Settlement or lapse of applicable statutes

     (891
  

 

 

 

Unrecognized tax benefits balance at December 31, 2012

   $ 12,911   

 

 

 

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Unrecognized tax benefits are reversed as a discrete event if an examination of applicable tax returns is not begun by a federal or state tax authority within the statute of limitations or upon effective settlement with federal or state tax authorities. During the year ended December 31, 2012, the Company reversed approximately $0.6 million of unrecognized tax benefits due to the expiration of the statute of limitations for the tax year ended December 31, 2004. During the year ended December 31, 2012, the Company reversed approximately $0.9 million of unrecognized tax benefits due to the effective settlement of an audit for the tax years ended December 31, 2004 through December 31, 2007. The Company’s open tax years that are subject to federal examination are 2008 through 2012.

During the next 12 months, it is reasonably possible the Company may reverse $0.5 million of the tax contingency reserves primarily related to expiring statutes of limitations.

11. Stock-based compensation

Stock option plan

On February 12, 2004, Ply Gem Investment Holdings’ Board of Directors adopted the Ply Gem Investment Holdings 2004 Stock Option Plan (the “Plan”) allowing for grants of options to purchase shares of Ply Gem Investment Holdings common stock under nonqualified stock options or incentive stock options. On February 24, 2006 in connection with the Alenco acquisition, a new holding company, Ply Gem Prime Holdings, was formed pursuant to a merger involving Ply Gem Investment Holdings. As a result, Ply Gem Prime Holdings became the sole shareholder of Ply Gem Investment Holdings, each outstanding share of capital stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime Holdings and Ply Gem Prime Holdings assumed Ply Gem Investment Holdings’ obligations under the Ply Gem Investment Holdings 2004 Stock Option Plan and the Ply Gem Investment Holdings Phantom Stock Plan. In connection therewith, each outstanding stock option and phantom unit of Ply Gem Investment Holdings was converted on a 1:1 basis into a stock option and phantom unit of Ply Gem Prime Holdings. Employees, directors and consultants of Ply Gem Prime Holdings or any of its majority-owned subsidiaries are eligible for options, as specified in the Plan. Ply Gem Prime Holdings’ Board of Directors may, among other things, select recipients of options grants, determine whether options will be nonqualified or incentive stock options, set the number of shares that may be purchased pursuant to option exercise, and determine other terms and conditions of options. The exercise price of an option must be at least the estimated fair market value of a share of common stock as of the grant date. Options generally vest over 5 years from the date of grant, unless specified otherwise in any individual option agreement. Generally, options will expire on the tenth anniversary of the grant date or in connection with termination of employment. The Board of Directors has the discretion to accelerate the vesting and exercisability of outstanding options.

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing method. The assumptions used in the model are outlined in the following table:

 

      December 31,
2012
    December 31,
2011
    December 31,
2010
 

 

 

Weighted average fair value of options granted

   $ 40.11      $ 35.07      $ 24.69   

Weighted average assumptions used:

      

Expected volatility

     46     46     30

Expected term (in years)

     5        3.65        5   

Risk-free interest rate

     0.64     0.91     2.42

Expected dividend yield

                     

 

 

 

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A summary of changes in stock options outstanding during the year ended December 31, 2012 is presented below:

 

      Stock
options
    Weighted-
average
exercise
price
     Weighted-
average
remaining
contractual
term (years)
 

 

 

Balance at January 1, 2012

     502,844      $ 68.57         6.75   

Granted

     26,000      $ 100.00           

Forfeited or expired

     (4,500          
  

 

 

      

Balance at December 31, 2012

     524,344      $ 70.16         5.95   

 

 

As of December 31, 2012, 158,494 options were 100% vested. At December 31, 2012, the Company had approximately $4.6 million of total unrecognized compensation expense that will be recognized over the weighted average period of 2.96 years. The Company recorded compensation expense of $1.7 million, $0.4 million, and $0.2 million for the years ended December 31, 2012, 2011, and 2010, respectively, related to the vesting of these options.

Other share-based compensation

Upon completion of each of the Ply Gem acquisition, MW acquisition and Alenco acquisition, certain members of management made a cash contribution to Ply Gem Prime Holdings in exchange for shares of Ply Gem Prime Holdings’ common stock. (As previously described, investments in connection with the Ply Gem acquisition and the MW acquisition were in Ply Gem Investment Holdings common stock, which stock was later converted into Ply Gem Prime Holdings common stock in connection with the Alenco acquisition.) Management’s shares of common stock are governed by the Ply Gem Prime Holdings Stockholders’ Agreement, which gives the management participants put rights in certain circumstances to put the stock back to Ply Gem Prime Holdings at a price that is determined using defined formulas contained within the Stockholders’ Agreement. The Stockholders’ Agreement contains two separate put right price formulas. The determination of which put right price formula will be applicable to each of the participant’s shares of common stock is based upon the participants reaching certain vesting requirements which are described in the Stockholders’ Agreement. The shares of common stock generally vest at a rate of 20% per year of service, but may vest earlier if certain events occur. Based on the above, the Company has accounted for these awards of shares of common stock under the modified transition method.

 

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On September 29, 2006 the Company amended the put right section of its Stockholders’ Agreement to require that Stockholders must have held vested shares for a minimum of six-months from the last day of the quarter during which such shares vested in order to receive the put right price formula for vested shares to ensure that stockholders are exposed to the risks and rewards of true equity ownership. As a result, the Company modified its accounting treatment, and as of September 29, 2006, treated these as equity classified awards. On September 29, 2006, the repurchase price under the put right formula was less than $0. As such, no compensation cost will be recognized for these shares.

 

      Common
stock shares
owned by
management
 

 

 

Balance at January 1, 2012

     452,872   

Shares issued

     1,800   

Shares repurchased

       
  

 

 

 

Balance at December 31, 2012

     454,672   

 

 

Restricted stock

During January 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors. These shares vested over the 2012 calendar period and the Company expensed these items as compensation expense ratably during 2012. During the year ended December 31, 2012, the Company expensed $180,000, related to these grants in selling, general, and administrative expenses within the consolidated statement of operations.

During December 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors. These shares will vest over the 2012 through 2013 twelve month period and the Company is expensing these items ratably over the twelve month period up to the vesting date. During the year ended December 31, 2012, the Company expensed $10,000, related to these grants in selling, general, and administrative expenses within the consolidated statement of operations.

Phantom stock

Upon the completion of the Ply Gem Acquisition and the MW Acquisition, certain members of management contributed their investment in predecessor companies in exchange for phantom common stock units and phantom preferred stock units which were governed by a phantom stock plan. Under the phantom stock plan, each participant’s interest in the plan was recorded in a bookkeeping account; however, no stock was initially issued under the phantom stock plan. Each account recorded a number of units so that, any “phantom common stock units” were deemed to be invested in common stock and any “phantom preferred stock units” were deemed invested in senior preferred stock. Under the plan, upon liquidation and payment of a participant’s account, the value of the account generally was to be paid to the participant either in cash or in shares of Prime Holdings’ stock having a fair market value equal to the account balance, in the discretion of Prime Holdings.

For the first three quarters of 2006, the phantom units were recognized by the Company as liability awards that had to be marked to market every quarter. During September 2006, the Company converted all phantom common and preferred stock units into a cash account payable

 

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on a fixed schedule in years 2007 and beyond. The value of the portion of each cash account that represented phantom common units equaled the number of phantom common stock units credited to the phantom plan account on September 25, 2006 multiplied by $10.00. From September 25, 2006 through January 31, 2007, the value of the cash account was updated as if interest was credited on such value and compounded at December 31, 2006 at a rate equal to the applicable federal rate for short-term loans. This portion of the account was paid to each party in a single lump-sum cash payment on January 31, 2007. The value of the portion of the cash account that represented the value of the phantom preferred stock units equaled the face amount of the number of shares of senior preferred stock represented by such units. This portion of the account is credited with deemed earnings, as if with interest, at an annual rate of 10% compounded semi-annually as of each June 30 and December 31, from the date of issuance of the phantom preferred stock unit through the date of payment. This portion of the account was payable on each of August 31, 2009, 2010, and 2011, such that one third of the original face amount, plus deemed earnings, was paid on each such date. During the years ended December 31, 2011 and 2010, the Company made cash phantom stock payments of approximately $2.3 million and $2.1 million, respectively. The final payment of approximately $2.3 million was paid during the year ended December 31, 2011 and, as a result, there was no liability on the consolidated balance sheet as of December 31, 2012 and 2011.

12. Segment information

The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Company has two reportable segments: 1) Siding, Fencing and Stone and 2) Windows and Doors.

The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses. Unallocated income and expenses include items which are not directly attributed to or allocated to either of the Company’s reporting segments. Such items include interest, legal costs, corporate payroll, and unallocated finance, accounting expenses, gain (loss) on modification or extinguishment of debt, and write-off of previously capitalized offering costs. Unallocated corporate assets include cash and certain receivables. Interest expense is presented net of interest income.

 

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Following is a summary of the Company’s segment information:

 

      For the year ended December 31,  
(amounts in thousands)    2012     2011     2010  

 

 

Net sales

      

Siding, Fencing and Stone

   $ 658,045      $ 639,290      $ 604,406   

Windows and Doors

     463,256        395,567        391,500   
  

 

 

 
   $ 1,121,301      $ 1,034,857      $ 995,906   
  

 

 

 

Operating earnings (loss)

      

Siding, Fencing and Stone

   $ 110,456      $ 90,849      $ 92,612   

Windows and Doors

     (20,565     (31,134     (19,410

Unallocated

     (19,871     (14,784     (16,372
  

 

 

 
   $ 70,020      $ 44,931      $ 56,830   
  

 

 

 

Interest expense, net

      

Siding, Fencing and Stone

   $ (47   $ (83   $ (121

Windows and Doors

     (18     (13     90   

Unallocated

     103,107        101,480        122,864   
  

 

 

 
   $ 103,042      $ 101,384      $ 122,833   
  

 

 

 

Depreciation and amortization

      

Siding, Fencing and Stone

   $ 22,616      $ 23,634      $ 27,614   

Windows and Doors

     29,490        30,217        32,936   

Unallocated

     171        169        168   
  

 

 

 
   $ 52,277      $ 54,020      $ 60,718   
  

 

 

 

Income tax expense

      

Unallocated

   $ 2,835      $ 683      $ 5,027   
      

Capital expenditures

      

Siding, Fencing and Stone

   $ 11,219      $ 6,776      $ 5,928   

Windows and Doors

     12,617        4,651        5,177   

Unallocated

     810        63          
  

 

 

 
   $ 24,646      $ 11,490      $ 11,105   

 

 
      As of December 31,         
     2012     2011        

 

 

Total assets

      

Siding, Fencing and Stone

   $ 558,501      $ 579,195     

Windows and Doors

     271,650        273,909     

Unallocated

     51,699        39,808     
  

 

 

   
   $ 881,850      $ 892,912     

 

 

Our Canadian subsidiary, which had sales of approximately $70.0 million for the year ended December 31, 2012, represents a majority of our sales to foreign customers. Other subsidiaries’ sales outside the United States are less than 1% of our total sales.

13. Related party transactions

Under the General Advisory Agreement (the “General Advisory Agreement”) the Company entered into with CI Capital Partners LLC (“CI Capital Partners”), formerly Caxton-Iseman Capital

 

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LLC , CI Capital Partners provides the Company with acquisition and financial advisory services as the Board of Directors shall reasonably request. In consideration of these services, the Company agreed to pay CI Capital Partners (1) an annual fee equal to 2% of our earnings before interest, tax, depreciation and amortization, (“EBITDA”), as defined in such agreement, (2) a transaction fee, payable upon the completion by the Company of any acquisition, of 2% of the sale price, (3) a transaction fee, payable upon the completion by the Company of any divestitures, of 1% of the sale price, and (4) a transaction fee, payable upon the completion of the sale of the Company, of 1% of the sale price. EBITDA in the General Advisory Agreement is based on the Company’s net income (loss) plus extraordinary losses and/or any net capital losses realized, provision for income taxes, interest expense (including amortization or write-off of debt discount and debt issuance costs and commissions, and other items), depreciation and amortization, dividends paid or accrued on preferred stock, certain management fees paid to CI Capital Partners, charges related to certain phantom units, and a number of other items. The annual fee payable in any year may not exceed the amounts permitted under the senior credit facilities or the indenture governing the senior secured notes, and CI Capital Partners is obligated to return any portion of the annual fee that has been prepaid if an event of default has occurred and is continuing under either the senior credit facilities or the indenture governing the senior secured notes.

Under the General Advisory Agreement the Company paid and expensed, as a component of selling, general, and administrative expenses, a management fee of approximately $2.5 million, $2.3 million, and $2.5 million, for the years ended December 31, 2012, 2011 and 2010, respectively. The original term of the General Advisory Agreement was 10 years, and was automatically renewable for consecutive one-year extensions, unless Ply Gem Industries or CI Capital Partners provide notice of termination. In addition, the General Advisory Agreement may be terminated by CI Capital Partners at any time, upon the occurrence of specified change of control transactions or upon an initial public offering of the Company’s shares or shares of any of the Company’s parent companies. During the fourth quarter of 2012, the Company and CI Capital Partners amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. If the General Advisory Agreement is terminated for any reason prior to the end of such extended term, Ply Gem Industries will pay to CI Capital Partners ‘an amount equal to the present value of the annual advisory fees that would have been payable through the end of the term or three years, whichever is less, based on Ply Gem Industries’ cost of funds to borrow amounts under Ply Gem Industries’ senior credit facilities.

During 2010, approximately $218.8 million aggregate principal amount of the 9% Senior Subordinated Notes held by such affiliates were transferred to the Company’s indirect stockholders and ultimately to Ply Gem Prime Holdings in exchange for equity of Ply Gem Prime valued at approximately $114.9 million. Such notes were then transferred to Ply Gem Holdings and then to Ply Gem Industries for no consideration as a capital contribution and cancelled on February 12, 2010. On February 16, 2010, Ply Gem Industries redeemed the remaining $141.2 million aggregate principal amount of outstanding 9% Senior Subordinated Notes (including approximately $62.5 million of the 9% Senior Subordinated Notes held by affiliates of the Company’s controlling stockholder). During the year ended December 31, 2010, the Company paid these affiliates approximately $9.8 million of interest for the 9% Senior Subordinated Notes owned by these related parties. These interest payments have been recorded within interest expense in the Company’s consolidated statement of operations.

During 2010, the Company received equity contributions of approximately $2.5 million from certain members of management. In addition, the Company repurchased equity of approximately

 

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$4.2 million from certain former and existing members of management. As of December 31, 2010, approximately $1.2 million was classified as a current liability in accrued expenses in the consolidated balance sheet. During the year ended December 31, 2011, the approximate $1.2 million was paid in cash by the Company and reflected as an equity repurchase in 2011 on the Company’s consolidated statement of cash flows.

During June 2010, the Company made a state tax payment of approximately $1.5 million for Ply Gem Prime. Ply Gem Prime incurred a state tax liability as a result of the 9% Senior Subordinated Note debt extinguishment and related contribution during the first quarter of 2010 in which Ply Gem Prime recognized a capital gain of approximately $13.3 million. Ply Gem Prime is a holding company with no independent operating assets or liabilities other than its investment in the Company and therefore has no ability to make tax payments. The Company recognized this payment as a return of capital.

During the fourth quarter of 2011, the Company entered into an amendment to the employee agreement originally dated August 14, 2006 for the Company’s chief executive officer. In conjunction with the amendment to the employment agreement, the Company also entered into a retention agreement and stock repurchase agreement. These agreements, among other things, provided for: (i) the extension of the chief executive officer’s term of employment for three years, (ii) the Company to make a retention payment of $2.0 million to the chief executive officer on December 31, 2014 if he remains employed by the Company on that date, (iii) the repurchase of 125,660 shares of common stock of Ply Gem Prime and (iv) the issuance of 150,000 stock options to the chief executive officer for non-voting Class C common stock of Ply Gem Prime. The $12.6 million repurchase of common stock was made by Ply Gem Prime based on proceeds provided by the Company. The stock options granted to the chief executive officer vest 25% on each of the following dates: July 2012, July 2013, July 2014, and July 2015.

The Company also entered into a retention agreement with the Company’s chief financial officer which will require the Company to make a retention payment of $0.7 million on December 31, 2014 if he remains employed by the Company on that date. The Company also repurchased equity of approximately $0.3 million during 2011 from a former member of management.

14. Quarterly results of operations (unaudited)

The following is a summary of the quarterly results of operations.

 

      Quarter ended
December 31,
    Quarter ended
September 29,
    Quarter ended
June 30,
     Quarter ended
March 31,
 
(amounts in thousands (except per share data))    2012     2012     2012      2012  

 

 

Net sales

   $ 268,643      $ 306,193      $ 307,289       $ 239,176   

Gross profit

     57,218        70,693        73,373         42,915   

Net income (loss)

     (15,007     (3,673 )(1)      5,267         (25,642

Basic and diluted net income (loss) attributable to common stockholders per common share

   $ (150,070   $ (36,730   $ 52,670       $ (256,420

Weighted average common shares outstanding

     100        100        100         100   

 

 

 

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      Quarter ended
December 31,
    Quarter ended
October 1,
    Quarter ended
July 2,
     Quarter ended
April 2,
 
(amounts in thousands (except per share data))    2011     2011     2011      2011  

 

 

Net sales

   $ 242,370      $ 297,889      $ 294,491       $ 200,107   

Gross profit

     49,899        65,822        67,029         27,782   

Net income (loss)

     (15,220     (458     2,063         (70,892 )(2) 

Basic and diluted net income (loss) attributable to common stockholders per common share

   $ (152,200   $ (4,580   $ 20,630       $ (708,920

Weighted average common shares outstanding

     100        100        100         100   

 

 

 

(1)   The net loss for the quarter ended September 29, 2012 includes an approximate $3.6 million loss on modification or extinguishment of debt. See Note 4 for description of loss on debt modification and extinguishment.
(2)   The net loss for the quarter ended April 2, 2011 includes an approximate $27.9 million loss on modification or extinguishment of debt. See Note 4 for description of loss on debt modification and extinguishment.

Significant fourth quarter adjustments

During the fourth quarter of 2011, the Company increased their environmental reserve by $1.6 million in connection with the completion of a preliminary cost estimate for an underground storage tank that was filed with the EPA during November 2011. The expense has been recognized within selling, general, and administrative expenses for the year ended December 31, 2011 in the consolidated statement of operations.

15. Guarantor/non-guarantor

The 8.25% Senior Secured Notes and the 9.375% Senior Notes were issued by our direct 100% owned subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries. Accordingly, the following guarantor and non-guarantor information is presented as of December 31, 2012 and December 31, 2011, and for the years ended December 31, 2012, 2011, and 2010. The non-guarantor information presented represents our Canadian subsidiary, Ply Gem Canada.

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statements of operations

For the year ended December 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Net sales

  $      $      $ 1,051,312      $ 69,989      $      $ 1,121,301   

Cost of products sold

                  826,496        50,606               877,102   
 

 

 

 

Gross profit

                  224,816        19,383               244,199   

Operating expenses:

           

Selling, general and administrative expenses

           19,871        112,073        15,298               147,242   

Intercompany administrative charges

                  15,202        3,057        (18,259       

Amortization of intangible assets

                  26,937                      26,937   
 

 

 

 

Total operating expenses

           19,871        154,212        18,355        (18,259     174,179   
 

 

 

 

Operating earnings (loss)

           (19,871     70,604        1,028        18,259        70,020   

Foreign currency gain

                         409               409   

Intercompany interest

           102,729        (102,729                     

Interest expense

           (103,112     (18     (3            (103,133

Interest income

           5        65        21               91   

Loss on modification or extinguishment of debt

           (3,607                          (3,607

Intercompany administrative income

           18,259                      (18,259       
 

 

 

 

Income (loss) before equity in subsidiaries’ income (loss)

           (5,597     (32,078     1,455               (36,220

Equity in subsidiaries’ income (loss)

    (39,055     (33,458                   72,513          
 

 

 

 

Income (loss) before provision (benefit) for income taxes

    (39,055     (39,055     (32,078     1,455        72,513        (36,220

Provision (benefit) for income taxes

                  3,150        (315            2,835   
 

 

 

 

Net income (loss)

  $ (39,055   $ (39,055   $ (35,228   $ 1,770      $ 72,513      $ (39,055
 

 

 

 

Other comprehensive income (loss):

           

Foreign currency translation adjustments

                         835               835   

Minimum pension liability for actuarial loss

           (673     (430                   (1,103
 

 

 

 

Total comprehensive income (loss)

  $ (39,055   $ (39,728   $ (35,658   $ 2,605      $ 72,513      $ (39,323

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statements of operations

For the year ended December 31, 2011

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Net sales

  $      $      $ 967,694      $ 67,163      $      $ 1,034,857   

Cost of products sold

                  777,256        47,069               824,325   
 

 

 

 

Gross profit

                  190,438        20,094               210,532   

Operating expenses:

           

Selling, general and administrative expenses

           14,748        109,061        15,103               138,912   

Intercompany administrative charges

                  13,287        2,783        (16,070       

Amortization of intangible assets

           36        26,653                      26,689   
 

 

 

 

Total operating expenses

           14,784        149,001        17,886        (16,070     165,601   
 

 

 

 

Operating earnings (loss)

           (14,784     41,437        2,208        16,070        44,931   

Foreign currency gain

                         492               492   

Intercompany interest

           102,729        (102,729                     

Interest expense

           (101,486     (1     (1            (101,488

Interest income

           6        83        15               104   

Loss on modification or extinguishment of debt

           (27,863                          (27,863

Intercompany administrative income

           16,070                      (16,070       
 

 

 

 

Income (loss) before equity in subsidiaries’ income (loss)

           (25,328     (61,210     2,714               (83,824

Equity in subsidiaries’ income (loss)

    (84,507     (59,179                   143,686          
 

 

 

 

Income (loss) before provision (benefit) for income taxes

    (84,507     (84,507     (61,210     2,714        143,686        (83,824

Provision (benefit) for income taxes

                  (170     853               683   
 

 

 

 

Net income (loss)

  $ (84,507   $ (84,507   $ (61,040   $ 1,861      $ 143,686      $ (84,507
 

 

 

 

Other comprehensive income (loss):

           

Foreign currency translation adjustments

                         (691            (691

Minimum pension liability for actuarial loss

           (3,091     (3,509                   (6,600
 

 

 

 

Total comprehensive income (loss)

  $ (84,507   $ (87,598   $ (64,549   $ 1,170      $ 143,686      $ (91,798

 

 

 

F-56


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statements of operations

For the year ended December 31, 2010

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Net sales

  $      $      $ 922,240      $ 73,666      $      $ 995,906   

Cost of products sold

                  730,896        49,050               779,946   
 

 

 

 

Gross profit

                  191,344        24,616               215,960   

Operating expenses:

           

Selling, general and administrative expenses

           14,765        101,767        13,928               130,460   

Intercompany administrative charges

                  12,143        1,639        (13,782       

Amortization of intangible assets

           36        27,063                      27,099   

Write-off of previously capitalized offering costs

           1,571                             1,571   
 

 

 

 

Total operating expenses

           16,372        140,973        15,567        (13,782     159,130   
 

 

 

 

Operating earnings (loss)

           (16,372     50,371        9,049        13,782        56,830   

Foreign currency gain

                         510               510   

Intercompany interest

           106,899        (106,086     (813              

Interest expense

           (122,881     (111                   (122,992

Interest income

           17        121        21               159   

Gain on extinguishment of debt

           98,187                             98,187   

Intercompany administrative income

           13,782                      (13,782       
 

 

 

 

Income (loss) before equity in subsidiaries’ income (loss)

           79,632        (55,705     8,767               32,694   

Equity in subsidiaries’ income (loss)

    27,667        (52,648                   24,981          
 

 

 

 

Income (loss) before provision (benefit) for income taxes

    27,667        26,984        (55,705     8,767        24,981        32,694   

Provision (benefit) for income taxes

           (683     3,273        2,437               5,027   
 

 

 

 

Net income (loss)

  $ 27,667      $ 27,667      $ (58,978   $ 6,330      $ 24,981      $ 27,667   
 

 

 

 

Other comprehensive income (loss):

           

Foreign currency translation adjustments

                         1,639               1,639   

Minimum pension liability for actuarial gain

           (292     (448                   (740
 

 

 

 

Total comprehensive income (loss)

  $ 27,667      $ 27,375      $ (59,426   $ 7,969      $ 24,981      $ 28,566   

 

 

 

F-57


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating balance sheet

As of December 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

ASSETS

           

Current Assets:

           

Cash and cash equivalents

  $      $ 23,332      $ (4,307   $ 8,169      $      $ 27,194   

Accounts receivable, net

                  107,961        7,091               115,052   

Inventories:

           

Raw materials

                  35,074        4,878               39,952   

Work in process

                  20,220        711               20,931   

Finished goods

                  35,927        3,482               39,409   
 

 

 

 

Total inventory

                  91,221        9,071               100,292   

Prepaid expenses and other current assets

           12        13,844        1,528               15,384   

Deferred income taxes

                  5,161        11               5,172   
 

 

 

 

Total current assets

           23,344        213,880        25,870               263,094   

Investments in subsidiaries

    (314,942     (212,065                   527,007          

Property and Equipment, at cost:

           

Land

                  3,565        172               3,737   

Buildings and improvements

                  36,320        1,621               37,941   

Machinery and equipment

           2,145        281,885        9,245               293,275   
 

 

 

 
           2,145        321,770        11,038               334,953   

Less accumulated depreciation

           (932     (228,596     (6,320            (235,848
 

 

 

 

Total property and equipment, net

           1,213        93,174        4,718               99,105   

Other Assets:

           

Intangible assets, net

                  94,356                      94,356   

Goodwill

                  383,042        9,413               392,455   

Deferred income taxes

                         2,981               2,981   

Intercompany note receivable

           856,739                      (856,739       

Other

           27,142        2,717                      29,859   
 

 

 

 

Total other assets

           883,881        480,115        12,394        (856,739     519,651   
 

 

 

 
  $ (314,942   $ 696,373      $ 787,169      $ 42,982      $ (329,732   $ 881,850   
 

 

 

 

LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY

  

         

Current Liabilities:

           

Accounts payable

  $      $ 254      $ 63,110      $ 4,433      $      $ 67,797   

Accrued expenses

           32,744        58,547        2,627               93,918   
 

 

 

 

Total current liabilities

           32,998        121,657        7,060               161,715   

Deferred income taxes

                  10,049                      10,049   

Intercompany note payable

                  856,739               (856,739       

Other long-term liabilities

           13,933        45,811        900               60,644   

Long-term debt

           964,384                             964,384   

Commitments and contingencies

           

Stockholder’s Equity (Deficit):

           

Preferred stock

                                         

Common stock

                                         

Additional paid-in-capital

    311,034        311,034        407,525        5,737        (724,296     311,034   

(Accumulated deficit) retained earnings

    (619,640     (619,640     (654,612     23,400        1,250,852        (619,640

Accumulated other comprehensive income (loss)

    (6,336     (6,336            5,885        451        (6,336
 

 

 

 

Total stockholder’s (deficit) equity

    (314,942     (314,942     (247,087     35,022        527,007        (314,942
 

 

 

 
  $ (314,942   $ 696,373      $ 787,169      $ 42,982      $ (329,732   $ 881,850   

 

 

 

F-58


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating balance sheet

As of December 31, 2011

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

ASSETS

 

Current Assets:

           

Cash and cash equivalents

  $      $ 8,578      $ (3,408   $ 6,530      $      $ 11,700   

Accounts receivable, net

                  102,052        7,463               109,515   

Inventories:

           

Raw materials

                  37,024        4,885               41,909   

Work in process

                  23,619        667               24,286   

Finished goods

                  36,282        2,328               38,610   
 

 

 

 

Total inventory

                  96,925        7,880               104,805   

Prepaid expenses and other current assets

           422        9,893        2,957               13,272   

Deferred income taxes

                  5,666        9               5,675   
 

 

 

 

Total current assets

           9,000        211,128        24,839               244,967   

Investments in subsidiaries

    (277,322     (164,863                   442,185          

Property and Equipment, at cost:

           

Land

                  3,565        172               3,737   

Buildings and improvements

                  35,280        1,308               36,588   

Machinery and equipment

           1,335        262,349        8,436               272,120   
 

 

 

 
           1,335        301,194        9,916               312,445   

Less accumulated depreciation

           (762     (206,585     (5,253            (212,600
 

 

 

 

Total property and equipment, net

           573        94,609        4,663               99,845   

Other Assets:

           

Intangible assets, net

                  121,148                      121,148   

Goodwill

                  382,165        9,302               391,467   

Deferred income taxes

                         3,121               3,121   

Intercompany note receivable

           856,739                      (856,739       

Other

           30,235        2,129                      32,364   
 

 

 

 

Total other assets

           886,974        505,442        12,423        (856,739     548,100   
 

 

 

 
  $ (277,322   $ 731,684      $ 811,179      $ 41,925      $ (414,554   $ 892,912   
 

 

 

 

LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY

  

       

Current Liabilities:

           

Accounts payable

  $      $ 720      $ 44,652      $ 4,718      $      $ 50,090   

Accrued expenses

           36,987        50,790        3,104               90,881   
 

 

 

 

Total current liabilities

           37,707        95,442        7,822               140,971   

Deferred income taxes

                  9,865                      9,865   

Intercompany note payable

                  856,739               (856,739       

Other long-term liabilities

           9,629        47,240        859               57,728   

Long-term debt

           961,670                             961,670   

Commitments and contingencies

           

Stockholder’s Equity (Deficit):

           

Preferred stock

                                         

Common stock

                                         

Additional paid-in-capital

    309,331        309,331        421,277        6,562        (737,170     309,331   

(Accumulated deficit) retained earnings

    (580,585     (580,585     (619,384     21,630        1,178,339        (580,585

Accumulated other comprehensive income (loss)

    (6,068     (6,068            5,052        1,016        (6,068
 

 

 

 

Total stockholder’s (deficit) equity

    (277,322     (277,322     (198,107     33,244        442,185        (277,322
 

 

 

 
  $ (277,322   $ 731,684      $ 811,179      $ 41,925      $ (414,554   $ 892,912   

 

 

 

F-59


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statement of cash flows

For the year ended December 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Cash flows from operating activities:

           

Net income (loss)

  $ (39,055   $ (39,055   $ (35,228   $ 1,770      $ 72,513      $ (39,055

Adjustments to reconcile net income (loss) to cash provided by operating activities:

           

Depreciation and amortization expense

           171        51,095        1,011               52,277   

Non-cash interest expense, net

           11,428                             11,428   

Gain on foreign currency transactions

                         (409            (409

Loss on modification or extinguishment of debt

           3,607                             3,607   

Stock based compensation

           1,703                        1,703   

Deferred income taxes

                  844        183               1,027   

Reduction in tax uncertainty, net of valuation allowance

                  (92                   (92

Equity in subsidiaries’ net loss

    39,055        33,458                      (72,513       

Other

                  (37                   (37

Changes in operating assets and liabilities:

           

Accounts receivable, net

                  (5,909     532               (5,377

Inventories

                  5,704        (1,008            4,696   

Prepaid expenses and other current assets

           616        (4,586     1,436               (2,534

Accounts payable

           (466     19,195        (1,123            17,606   

Accrued expenses

           (562     5,794        (640            4,592   

Cash payments on restructuring liabilities

                  (1,177                   (1,177

Other

                  (240     689               449   
 

 

 

 

Net cash provided by operating activities

           10,900        35,363        2,441               48,704   

Cash flows from investing activities:

           

Capital expenditures

           (810     (22,969     (867            (24,646

Proceeds from sale of assets

                  284        (91            193   

Acquisitions, net of cash acquired

                  (100                   (100
 

 

 

 

Net cash used in investing activities

           (810     (22,785     (958            (24,553

Cash flows from financing activities:

           

Proceeds from long-term debt

           102,991                             102,991   

Payments on long-term debt

           (58,991                          (58,991

Net revolver payments

           (40,000                          (40,000

Proceeds from intercompany investment

           13,477        (13,477                     

Payment of early tender premium

           (9,844                          (9,844

Equity repurchases

                                         

Debt issuance costs paid

           (2,969                          (2,969
 

 

 

 

Net cash provided by (used in) financing activities

           4,664        (13,477                   (8,813

Impact of exchange rate movement on cash

                         156               156   
 

 

 

 

Net increase (decrease) in cash and cash equivalents

           14,754        (899     1,639               15,494   

Cash and cash equivalents at the beginning of the period

           8,578        (3,408     6,530               11,700   
 

 

 

 

Cash and cash equivalents at the end of the period

  $      $ 23,332      $ (4,307   $ 8,169      $      $ 27,194   

 

 

 

F-60


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statement of cash flows

For the year ended December 31, 2011

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Cash flows from operating activities:

           

Net income (loss)

  $ (84,507   $ (84,507   $ (61,040   $ 1,861      $ 143,686      $ (84,507

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

           

Depreciation and amortization expense

           169        52,951        900               54,020   

Non-cash interest expense, net

           10,518                             10,518   

Gain on foreign currency transactions

                         (492            (492

Loss on modification or extinguishment of debt

           27,863                             27,863   

Stock based compensation

           431        (1                   430   

Deferred income taxes

                  7,872        (1,579            6,293   

Reduction in tax uncertainty, net of valuation allowance

                  (6,617                   (6,617

Equity in subsidiaries’ net loss

    84,507        59,179                      (143,686       

Other

                  (481     (3            (484

Changes in operating assets and liabilities:

           

Accounts receivable, net

                  (13,107     (159            (13,266

Inventories

                  (5,253     (1,160            (6,413

Prepaid expenses and other current assets

           (176     (1,622     (150            (1,948

Accounts payable

           321        (6,593     1,500               (4,772

Accrued expenses

           11,300        3,256        758               15,314   

Cash payments on restructuring liabilities

                  (407                   (407

Other

           (1     531        479               1,009   
 

 

 

 

Net cash provided by (used in) operating activities

           25,097        (30,511     1,955               (3,459

Cash flows from investing activities:

           

Capital expenditures

           (63     (10,490     (937            (11,490

Proceeds from sale of assets

                  102                      102   
 

 

 

 

Net cash used in investing activities

           (63     (10,388     (937            (11,388

Cash flows from financing activities:

           

Proceeds from long-term debt

           423,684                             423,684   

Payments on long-term debt

           (348,684                          (348,684

Net revolver borrowings

           55,000                             55,000   

Payments on previous revolver credit facility

           (30,000                          (30,000

Proceeds from intercompany investment

           (37,826     38,608        (782              

Payment of early tender premium

           (49,769                          (49,769

Equity repurchases

           (14,049                          (14,049

Debt issuance costs paid

           (26,984                          (26,984
 

 

 

 

Net cash provided by (used in) financing activities

           (28,628     38,608        (782            9,198   

Impact of exchange rate movement on cash

                         (149            (149
 

 

 

 

Net increase (decrease) in cash and cash equivalents

           (3,594     (2,291     87               (5,798

Cash and cash equivalents at the beginning of the period

           12,172        (1,117     6,443               17,498   
 

 

 

 

Cash and cash equivalents at the end of the period

  $      $ 8,578      $ (3,408   $ 6,530      $      $ 11,700   

 

 

 

F-61


Table of Contents

Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statement of cash flows

For the year ended December 31, 2010

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Cash flows from operating activities:

           

Net income (loss)

  $ 27,667      $ 27,667      $ (58,978   $ 6,330      $ 24,981      $ 27,667   

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

           

Depreciation and amortization expense

           168        59,761        789               60,718   

Non-cash interest expense, net

           9,800                             9,800   

Gain on foreign currency transactions

                         (510            (510

Gain on extinguishment of debt

           (98,187                          (98,187

Write-off of previously capitalized offering costs

           1,571                             1,571   

Stock based compensation

           164                             164   

Deferred income taxes

                  981        622               1,603   

Equity in subsidiaries’ net income (loss)

    (27,667     52,648                      (24,981       

Other

                  (156     (12            (168

Changes in operating assets and liabilities:

           

Accounts receivable, net

                  (3,730     707               (3,023

Inventories

                  (1,384     1,264               (120

Prepaid expenses and other current assets

           (1,488     6,634        2,478               7,624   

Accounts payable

           (199     1,090        1,026               1,917   

Accrued expenses

           (4,384     4,211        625               452   

Cash payments on restructuring liabilities

                  (2,630                   (2,630

Other

           (1     (554     425               (130
 

 

 

 

Net cash provided by (used in) operating activities

           (12,241     5,245        13,744               6,748   

Cash flows from investing activities:

           

Capital expenditures

                  (10,275     (830            (11,105

Proceeds from sale of assets

                  2,032                      2,032   
 

 

 

 

Net cash used in investing activities

                  (8,243     (830            (9,073

Cash flows from financing activities:

           

Proceeds from long-term debt

           145,709                             145,709   

Payments on long-term debt

           (141,191                          (141,191

Net revolver borrowings

           5,000                             5,000   

Proceeds from intercompany investment

           14,665        (711     (13,954              

Equity contributions

           2,428                             2,428   

Equity repurchases

           (2,978                          (2,978

Debt issuance costs paid

           (5,029                          (5,029

Tax payments on behalf of parent

           (1,532                          (1,532
 

 

 

 

Net cash provided by (used in) financing activities

           17,072        (711     (13,954            2,407   

Impact of exchange rate movement on cash

                         353               353   
 

 

 

 

Net increase (decrease) in cash and cash equivalents

           4,831        (3,709     (687            435   

Cash and cash equivalents at the beginning of the period

           7,341        2,592        7,130               17,063   
 

 

 

 

Cash and cash equivalents at the end of the period

  $      $ 12,172      $ (1,117   $ 6,443      $      $ 17,498   

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidated statements of operations

and comprehensive loss

(Unaudited)

 

      For the three months ended  
(amounts in thousands (except per share data))    March 30,
2013
    March 31,
2012
 

 

 

Net sales

   $ 257,097      $ 239,176   

Cost of products sold

     215,251        196,261   
  

 

 

 

Gross profit

     41,846        42,915   

Operating expenses:

    

Selling, general and administrative expenses

     38,216        34,993   

Amortization of intangible assets

     4,202        6,719   
  

 

 

 

Total operating expenses

     42,418        41,712   
  

 

 

 

Operating earnings (loss)

     (572     1,203   

Foreign currency (loss) gain

     (33     68   

Interest expense

     (23,668     (25,056

Interest income

     15        15   
  

 

 

 

Loss before provision for income taxes

     (24,258     (23,770

Provision for income taxes

     3,849        1,872   
  

 

 

 

Net loss

   $ (28,107   $ (25,642
  

 

 

 

Comprehensive loss

   $ (28,875   $ (24,979
  

 

 

 

Net loss per common share:

    

Basic and diluted net loss attributable to common stockholders per common share:

   $ (281,070   $ (256,420
  

 

 

 

Weighted average common shares outstanding

     100        100   
  

 

 

 

Pro forma earnings (loss) per common share (unaudited):

    

Pro forma basic earnings (loss) per common share

   $       
  

 

 

   

Pro forma basic weighted average common shares outstanding

    
  

 

 

   

Pro forma diluted earnings (loss) per common share

   $       
  

 

 

   

Pro forma diluted weighted average common shares outstanding

    

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidated balance sheets

(Unaudited)

 

(amounts in thousands, except share amounts)    March 30,
2013
    December 31,
2012
 

 

 
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 11,162      $ 27,194   

Accounts receivable, less allowances of $3,343 and $3,584, respectively

     136,553        115,052   

Inventories:

    

Raw materials

     51,626        39,952   

Work in process

     25,205        20,931   

Finished goods

     45,879        39,409   
  

 

 

 

Total inventory

     122,710        100,292   

Prepaid expenses and other current assets

     16,061        15,384   

Deferred income taxes

     5,224        5,172   
  

 

 

 

Total current assets

     291,710        263,094   

Property and Equipment, at cost:

    

Land

     3,737        3,737   

Buildings and improvements

     38,422        37,941   

Machinery and equipment

     299,242        293,275   
  

 

 

 

Total property and equipment

     341,401        334,953   

Less accumulated depreciation

     (241,050     (235,848
  

 

 

 

Total property and equipment, net

     100,351        99,105   

Other Assets:

    

Intangible assets, net

     90,153        94,356   

Goodwill

     392,224        392,455   

Deferred income taxes

     2,871        2,981   

Other

     28,807        29,859   
  

 

 

 

Total other assets

     514,055        519,651   
  

 

 

 
   $ 906,116      $ 881,850   
  

 

 

 
LIABILITIES AND STOCKHOLDER’S DEFICIT     

Current Liabilities:

    

Accounts payable

   $ 79,582      $ 67,797   

Accrued expenses

     79,918        93,918   
  

 

 

 

Total current liabilities

     159,500        161,715   

Deferred income taxes

     13,002        10,049   

Other long-term liabilities

     60,719        60,644   

Long-term debt

     1,016,256        964,384   

Commitments and contingencies

    

Stockholder’s Deficit:

    

Preferred stock $0.01 par, 100 shares authorized, none issued and outstanding

              

Common stock $0.01 par, 100 shares authorized, issued and outstanding

              

Additional paid-in-capital

     311,490        311,034   

Accumulated deficit

     (647,747     (619,640

Accumulated other comprehensive loss

     (7,104     (6,336
  

 

 

 

Total stockholder’s deficit

     (343,361     (314,942
  

 

 

 
   $ 906,116      $ 881,850   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidated statements of cash flows

(Unaudited)

 

      For the three months ended  
(amounts in thousands)    March 30,
2013
    March 31,
2012
 

 

 

Cash flows from operating activities:

    

Net loss

   $ (28,107   $ (25,642

Adjustments to reconcile net loss to cash used in operating activities:

    

Depreciation and amortization expense

     9,715        13,317   

Non-cash interest expense, net

     2,833        2,905   

Loss (gain) on foreign currency transactions

     33        (68

Stock based compensation

     456        376   

Deferred income taxes

     3,048        806   

(Decrease) increase in tax uncertainty, net of valuation allowance

     (206     862   

Other

     (8     (1

Changes in operating assets and liabilities:

    

Accounts receivable, net

     (21,329     (22,706

Inventories

     (22,229     (9,734

Prepaid expenses and other assets

     (511     (1,365

Accounts payable

     11,697        23,961   

Accrued expenses

     (13,235     (19,322

Cash payments on restructuring liabilities

     (539       

Other

     (1,032     96   
  

 

 

 

Net cash used in operating activities

     (59,414     (36,515

Cash flows from investing activities:

    

Capital expenditures

     (6,665     (3,350

Proceeds from sale of assets

     11        121   
  

 

 

 

Net cash used in investing activities

     (6,654     (3,229

Cash flows from financing activities:

    

Proceeds from long-term debt

            34,000   

Net revolver borrowings

     50,000        15,000   

Debt issuance costs paid

     (62     (866
  

 

 

 

Net cash provided by financing activities

     49,938        48,134   

Impact of exchange rate movements on cash

     98        107   
  

 

 

 

Net increase (decrease) in cash and cash equivalents

     (16,032     8,497   

Cash and cash equivalents at the beginning of the period

     27,194        11,700   
  

 

 

 

Cash and cash equivalents at the end of the period

   $ 11,162      $ 20,197   

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Ply Gem Holdings, Inc. and subsidiaries

Notes to condensed consolidated financial statements

(Unaudited)

1. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of Ply Gem Holdings, Inc. and its subsidiaries (referred to herein as “Ply Gem Holdings”, “Ply Gem”, the “Company”, “we”, “us”, or “our”) have been prepared in accordance with U.S. generally accepted accounting principles as described in the consolidated financial statements and related notes included in our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2013. These statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles and should be read in conjunction with our 2012 Annual Report on Form 10-K. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation have been included. Operating results for the period from January 1, 2013 through March 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

Prior to January 11, 2010, Ply Gem Holdings was a wholly owned subsidiary of Ply Gem Investment Holdings, Inc. (“Ply Gem Investment Holdings”), which was wholly owned by Ply Gem Prime Holdings, Inc. (“Ply Gem Prime”). Ply Gem Investment Holdings was incorporated on January 23, 2004 by affiliates of CI Capital Partners LLC (“CI Capital Partners”) for the purpose of acquiring Ply Gem Industries, Inc. (“Ply Gem Industries”) from Nortek, Inc. (“Nortek”). On January 11, 2010, Ply Gem Investment Holdings was merged with and into Ply Gem Prime, with Ply Gem Prime as the surviving corporation. As a result, each outstanding share of senior preferred stock of Ply Gem Investment Holdings was converted into a share of a corresponding class of shares of the capital stock of Ply Gem Prime. As a result, Ply Gem Holdings is currently a wholly owned subsidiary of Ply Gem Prime. The Ply Gem acquisition was completed on February 12, 2004, when Nortek sold Ply Gem Industries to Ply Gem Holdings pursuant to the terms of the stock purchase agreement among Ply Gem Investment Holdings, Nortek, and WDS LLC, dated as of December 19, 2003, as amended.

The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements of Ply Gem Holdings at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

The Company’s fiscal quarters are based on periods ending on the Saturday of the last week in the quarter. Therefore, the financial results of certain fiscal quarters will not be comparable to the prior and subsequent fiscal quarters. The accompanying financial statements include the Company’s condensed consolidated statements of operations for the three months ended March 30, 2013 and March 31, 2012, the condensed consolidated statements of cash flows for the three months ended March 30, 2013 and March 31, 2012, and the condensed consolidated balance sheets as of March 30, 2013 and December 31, 2012.

Ply Gem is a diversified manufacturer of exterior building products, which are sold primarily in the United States and Canada, and include a wide variety of products for the residential and commercial construction, the do-it-yourself and the professional remodeling and renovation markets. The demand for the Company’s products is seasonal, particularly in the Northeast and

 

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Midwest regions of the United States and Western Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home repair and remodeling and new home construction sectors. The Company’s sales are usually lower during the first and fourth quarters.

To a significant extent our performance is dependent upon the levels of home repair and remodeling and new home construction spending, all of which are affected by such factors as interest rates, inflation, consumer confidence, unemployment, and availability of consumer credit.

Principles of consolidation

The condensed consolidated financial statements include the accounts of Ply Gem Holdings and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.

Accounting policies and use of estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles involves estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expense during the reporting periods. Certain of the Company’s accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company periodically evaluates the judgments and estimates used in their critical accounting policies to ensure that such judgments and estimates are reasonable. Such estimates include the allowance for doubtful accounts receivable, rebates, pensions, valuation reserve for inventories, warranty reserves, legal contingencies, assumptions used in the calculation of income taxes, projected cash flows used in the goodwill and intangible asset impairment tests, and environmental accruals and other contingencies. These judgments are based on the Company’s historical experience, current trends and information available from other sources, and are based on management’s best estimates and judgments. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity markets, foreign currency, litigation risk, and the depressed housing and remodeling markets have combined to increase the uncertainty inherent in such estimates and assumptions. If different conditions result from those assumptions used in the Company’s judgments, actual results could be materially different from the Company’s estimates.

Cash and cash equivalents

Cash equivalents consist of short-term highly liquid investments with original maturities of three months or less and which are readily convertible into cash.

Accounts receivable

Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts was $3.3 million and $3.6 million at March 30, 2013 and December 31, 2012, respectively. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company estimates the allowance for doubtful accounts based on a variety of factors including the length of time

 

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receivables are past due, the financial health of its customers, unusual macroeconomic conditions and historical experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible trade accounts receivable against the allowance for doubtful accounts when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.

Inventories

Inventories in the accompanying consolidated balance sheets are valued at the lower of cost or market and are determined primarily by the first-in, first-out (FIFO) method. The Company records provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires the Company to make subjective judgments and estimates concerning future sales levels, quantities and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause actual results to differ from the estimates at the time such inventory is disposed or sold. As of March 30, 2013, the Company had inventory purchase commitments of approximately $50.9 million.

The inventory reserves were approximately $6.2 million at March 30, 2013, decreasing during 2013 by $0.3 million compared to the December 31, 2012 reserve balance of approximately $6.5 million.

Property and equipment

Property and equipment are presented at cost. Depreciation of property and equipment are provided on a straight-line basis over estimated useful lives, which are generally as follows:

 

        Buildings and improvements

   10-37 years

        Machinery and equipment, including leases

   3-15 years

        Leasehold improvements

   Term of lease or useful life, whichever is shorter

Expenditures for maintenance and repairs are expensed when incurred. Expenditures for renewals and betterments are capitalized. When assets are sold, or otherwise disposed, the cost and related accumulated depreciation are eliminated and the resulting gain or loss is recognized in operations.

Intangible assets, goodwill and other long-lived assets

Long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on the asset’s fair value and the discounted cash flow.

The Company tests for long-lived asset impairment at the following asset group levels: (i) Siding, Fencing and Stone (“Siding”), (ii) the combined U.S. Windows companies in the Windows and Doors segment (“US Windows”), and (iii) Ply Gem Canada (formerly known as CWD Windows and

 

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Doors, Inc.) in the Windows and Doors segment. For purposes of recognition and measurement of an impairment loss, a long-lived asset or asset group should represent the lowest level for which an entity can separately identify cash flows that are largely independent of the cash flows of other assets and liabilities. There were no indicators of impairment during the three months ended March 30, 2013.

Goodwill

The Company evaluates goodwill for impairment on an annual basis and whenever events or business conditions warrant. All other intangible assets are amortized over their estimated useful lives. The Company assesses goodwill for impairment at the November month end each year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. To evaluate goodwill for impairment, the Company estimates the fair value of reporting units considering such factors as discounted cash flows and valuation multiples for comparable publicly traded companies. A significant reduction in projected sales and earnings, which would lead to a reduction in future cash flows, could indicate potential impairment. There were no indicators of impairment during the three months ended March 30, 2013 that would trigger an interim impairment test. The Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets could result in goodwill impairments.

Debt issuance costs

Debt issuance costs, composed of facility, agency, and certain legal fees associated with issuing new debt financing, are amortized over the contractual term of the related agreement using the effective interest method. Net debt issuance costs totaled approximately $22.7 million and $23.6 million as of March 30, 2013 and December 31, 2012, respectively, and have been recorded in other long term assets in the accompanying condensed consolidated balance sheets. Amortization of debt issuance costs for the three months ended March 30, 2013 and March 31, 2012 was approximately $0.9 million and $1.3 million, respectively. Amortization of debt issuance costs is recorded in interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss.

Income taxes

The Company utilizes the asset and liability method of accounting for income taxes which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary differences between the book and tax basis of various assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of changes in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period in which the rate change occurs. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states that the Company and its subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. The Company establishes reserves when, despite our belief that our tax

 

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return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. Currently, U.S. federal income tax returns are prepared and filed by Ply Gem Prime on behalf of itself, Ply Gem Holdings, and Ply Gem Industries and its U.S. subsidiaries. The Company has executed a tax sharing agreement with Ply Gem Holdings and Ply Gem Prime pursuant to which tax liabilities for each respective party are computed on a stand-alone basis. The Company’s U.S. subsidiaries file unitary, combined federal income tax returns and separate state income tax returns. Ply Gem Canada files separate Canadian income tax returns.

Environmental

The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Environmental remediation obligation accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Foreign currency

Ply Gem Canada, the Company’s Canadian subsidiary, utilizes the Canadian dollar as its functional currency. For reporting purposes, the Company translates the assets and liabilities of its foreign entity at the exchange rates in effect at period-end. Net sales and expenses are translated using average exchange rates in effect during the period. Gains and losses from foreign currency translation are credited or charged to accumulated other comprehensive income or loss in the accompanying condensed consolidated balance sheets.

The Company recorded a loss from foreign currency transactions of approximately $(0.03) million, for the three months ended March 30, 2013, and a gain of approximately $0.1 million for the three months ended March 31, 2012. As of March 30, 2013 and March 31, 2012, accumulated other comprehensive loss included a currency translation adjustment of approximately $(0.8) million and $0.7 million, respectively.

Fair value measurement

The accounting standard for fair value discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

Level 3: Inputs that reflect the reporting entity’s own assumptions.

 

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The hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:

 

(amounts in thousands)   Carrying
value
   

Fair value

total

   

Quoted prices
in active markets
for identical
assets

(Level 1)

    Significant
other
observable
inputs
(Level 2)
   

Significant
unobservable
inputs

(Level 3)

 

 

 

Description

         

Liabilities:

         

Senior Notes-9.375%

  $ 160,000      $ 174,800      $ 174,800      $           —      $           —   

Senior Secured Notes-8.25%

    840,000        913,500        913,500                 
 

 

 

 

As of March 30, 2013

  $ 1,000,000      $ 1,088,300      $ 1,088,300      $      $   
 

 

 

 

Liabilities:

         

Senior Notes-9.375%

  $ 160,000      $ 170,400      $ 170,400      $      $   

Senior Secured Notes-8.25%

    840,000        907,200        907,200                 
 

 

 

 

As of December 31, 2012

  $ 1,000,000      $ 1,077,600      $ 1,077,600      $      $   

 

 

The fair value of the long-term debt instruments was determined by utilizing available market information. The carrying value of the Company’s other financial instruments approximates their fair value.

Earnings (loss) per common share

The unaudited pro forma earnings (loss) per common share is being presented to give effect to the shares of Ply Gem Holdings common stock that will be issued in connection with the merger of the Company with its parent, Ply Gem Prime Holdings. In connection with the proposed initial public offering, the Company will merge with Ply Gem Prime Holdings and engage in a series of transactions that will result in the conversion of outstanding common stock and preferred stock (including the subordinated debt of its parent that will have been previously converted into preferred stock) of its parent into common equity of Ply Gem Holdings and result in a single class of outstanding common stock of Ply Gem Holdings (the “Reorganization”). In connection with this Reorganization, the outstanding options to purchase Ply Gem Prime Holdings common stock will convert into Ply Gem Holdings stock options. The pro forma weighted average common shares outstanding assume the conversion of the Ply Gem Prime Holdings outstanding common stock and preferred stock (including the subordinated debt of Ply Gem Prime Holdings that will have been previously converted into preferred stock) into shares of Ply Gem Holdings common stock upon the consummation of the Reorganization.

Basic and diluted earnings per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares outstanding. The Company had 100 shares of common stock outstanding for the three months ended March 30, 2013 and March 31, 2012. In addition, all stock options and preferred stock are issued at the Ply Gem Prime level; therefore, no dilutive effect would exist at Ply Gem Holdings as these amounts have been recorded within additional paid in capital. Consequently, for purposes of EPS the Company calculated the amounts as net income (loss) divided by the 100 shares of common stock outstanding.

 

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In connection with the proposed initial public offering, the Company will merge with its parent company, Ply Gem Prime Holdings, which will result in the conversion of outstanding common stock and preferred stock (including the subordinated debt of its parent that will have been previously converted into preferred stock) of its parent into Ply Gem Holdings common equity and result in a single class of outstanding common stock. In connection with this Reorganization, the outstanding options to purchase Ply Gem Prime Holdings common stock will convert into Ply Gem Holdings stock options.

The unaudited pro forma earnings (loss) per common share is being presented to show the impact of the conversion of the outstanding common stock and preferred stock (including the subordinated debt of Ply Gem Prime Holdings that will have been previously converted into preferred stock) of Ply Gem Prime Holdings to Ply Gem Holdings common stock that will occur in connection with the Reorganization. The unaudited pro forma basic earnings (loss) per common share is computed by dividing income (loss) attributable to common stockholders by the unaudited pro forma weighted average number of common shares outstanding for the period.

The treasury stock effect of Ply Gem Holdings stock options to be issued in connection with the Reorganization has not been included in the computation of the unaudited pro forma diluted loss per common share for the three months ended March 30, 2013 and March 31, 2012 as their effect would be anti-dilutive.

The following details the computation of the pro forma earnings (loss) per common share:

 

      For the three months ended  
     March 30, 2013     March 31, 2012  
(amounts in thousands (except per share data))    (unaudited)     (unaudited)  

 

 

Net loss

   $ (28,107   $ (25,642

Unaudited pro forma weighted average common share calculation:

    

Conversion of Ply Gem Prime Holdings common stock

    

Conversion of Ply Gem Prime Holdings preferred stock

    

Unaudited basic pro forma weighted average shares outstanding

    

Treasury stock effect of outstanding stock options

    

Unaudited diluted pro forma weighted average shares outstanding

    

Pro forma loss per common share:

    

Pro forma basic loss per common share

    

Pro forma diluted loss per common share

    

 

 

2. Goodwill

The Company records the excess of purchase price over the fair value of the net assets of acquired companies as goodwill or other identifiable intangible assets. The Company performs an annual test for goodwill impairment at the November month end each year (November 24th for 2012) and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. The Company has defined its reporting units and performs the impairment testing of goodwill at the operating segment level. The Company has two reporting units: 1) Siding, Fencing and Stone and 2) Windows and Doors. Separate valuations are performed for each of these reporting units in order to test for impairment.

 

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The Company uses the two-step method to determine goodwill impairment. If the carrying amount of a reporting unit exceeds its fair value (“Step One”), the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets (“Step Two”). The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill. The Company has elected not to utilize the qualitative Step Zero impairment assessment. There was no goodwill impairment for the year ended December 31, 2012 and no impairment indicators which would trigger an interim impairment test during the three months ended March 30, 2013.

To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies. The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate. The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples. These comparable public company multiples are then applied to the reporting unit’s financial performance. The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable. Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.

The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples. In order to accurately forecast future cash flows, the Company estimates single family housing starts and the repair and remodeling market’s growth rates. However, there is no assurance that: (1) valuation multiples will not decline, (2) discount rates will not increase, or (3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to evaluate goodwill during future periods and future declines in the residential housing and repair and remodeling markets could result in goodwill impairments.

The reporting unit goodwill balances were as follows as of March 30, 2013 and December 31, 2012:

 

(amounts in thousands)    March 30, 2013      December 31, 2012  

 

 

Siding, Fencing and Stone

   $ 320,984       $ 320,984   

Windows and Doors

     71,240         71,471   
  

 

 

 
   $ 392,224       $ 392,455   

 

 

 

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3. Intangible assets, net

The table that follows presents the major components of intangible assets as of March 30, 2013 and December 31, 2012:

 

(amounts in thousands)    Average
amortization
period
(in years)
     Cost      Accumulated
amortization
    Net carrying
value
 

 

 

As of March 30, 2013:

          

Patents

     14       $ 12,770       $ (8,543   $ 4,227   

Trademarks/Tradenames

     11         85,669         (62,554     23,115   

Customer relationships

     13         158,158         (96,071     62,087   

Other

        2,647         (1,923     724   
     

 

 

 

Total intangible assets

     13       $ 259,244       $ (169,091   $ 90,153   

As of December 31, 2012:

          

Patents

     14       $ 12,770       $ (8,308   $ 4,462   

Trademarks/Tradenames

     11         85,669         (61,737     23,932   

Customer relationships

     13         158,158         (93,025     65,133   

Other

        2,647         (1,818     829   
     

 

 

 

Total intangible assets

     13       $ 259,244       $ (164,888   $ 94,356   

 

 

Estimated amortization expense for the fiscal years 2013 through 2017 is shown in the following table:

 

(amounts in thousands)    Amortization expense  

 

 

2013 (remainder of year)

   $ 12,475   

2014

     15,248   

2015

     14,799   

2016

     14,156   

2017

     10,420   

 

 

4. Comprehensive loss

Comprehensive loss is comprised of the following:

 

(amounts in thousands)    For the three months ended  
   March 30, 2013     March 31, 2012  

 

 

Net loss

   $ (28,107   $ (25,642

Foreign currency translation adjustment

     (768     663   
  

 

 

 

Comprehensive loss

   $ (28,875   $ (24,979

 

 

 

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5. Long-term debt

Long-term debt in the accompanying condensed consolidated balance sheets at March 30, 2013 and December 31, 2012 consists of the following:

 

(amounts in thousands)    March 30,
2013
     December 31,
2012
 

 

 

Senior secured asset based revolving credit facility

   $ 65,000       $ 15,000   

8.25% Senior secured notes due 2018, net of unamortized early tender premium and discount of $39,286 and $40,870, respectively

     800,714         799,130   

9.375% Senior notes due 2017, net of unamortized discount of $9,458 and $9,746, respectively

     150,542         150,254   
  

 

 

 
   $ 1,016,256       $ 964,384   

 

 

8.25% Senior Secured Notes due 2018

On February 11, 2011, Ply Gem Industries issued $800.0 million of 8.25% Senior Secured Notes due 2018 at par. Ply Gem Industries used the proceeds to purchase approximately $724.6 million principal amount of its outstanding 11.75% Senior Secured Notes in a tender offer, to redeem the remaining approximate $0.4 million principal amount of outstanding 11.75% Senior Secured Notes, and to pay related fees and expenses. A portion of the early tender premiums and the original unamortized discount on the 11.75% Senior Secured Notes was recorded as a discount on the $800.0 million of 8.25% Senior Secured Notes due 2018 given that the 2011 transaction was predominately accounted for as a loan modification. On February 16, 2012, Ply Gem Industries issued an additional $40.0 million aggregate principal amount of its 8.25% Senior Secured Notes in a private placement transaction (the “Senior Tack-on Notes”). The net proceeds of approximately $32.7 million, after deducting $6.0 million for the debt discount and $1.3 million in transaction costs, have been and will continue to be utilized for general corporate purposes. The additional $40.0 million of 8.25% Senior Secured Notes have the same terms and covenants as the original $800.0 million of 8.25% Senior Secured Notes due 2018. The 8.25% Senior Secured Notes originally issued in February 2011 and the Senior Tack-on Notes issued in February 2012 (collectively, the “8.25% Senior Secured Notes”) will mature on February 15, 2018 and bear interest at the rate of 8.25% per annum. Interest will be paid semi-annually on February 15 and August 15 of each year.

Prior to February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to February 15, 2014, Ply Gem Industries may redeem up to 35% of the aggregate principal amount of the 8.25% Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 108.25% of the aggregate principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any, provided that at least 55% of the original aggregate principal amount of the 8.25% Senior Secured Notes remains outstanding after the redemption. In addition, not more than once during any twelve-month period, Ply Gem Industries may redeem up to the greater of (i) $80.0 million of the 8.25% Senior Secured Notes and (ii) 10% of the principal amount of the 8.25% Senior Secured Notes issued pursuant to the indenture governing the 8.25% Senior Secured Notes (including additional notes) at a redemption price equal to 103% of the principal amount of the 8.25% Senior Secured Notes, plus accrued and unpaid interest, if any. At any time on or after February 15, 2014, Ply Gem Industries may redeem the 8.25% Senior Secured Notes, in whole or in part, at declining

 

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redemption prices set forth in the indenture governing the 8.25% Senior Secured Notes, plus, in each case, accrued and unpaid interest, if any, to the redemption date.

The 8.25% Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Ply Gem Holdings and all of the domestic subsidiaries of Ply Gem Industries (the “Guarantors”). The indenture governing the 8.25% Senior Secured Notes contains certain covenants that limit the ability of Ply Gem Industries and its restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into agreements restricting their ability to pay dividends, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, Ply Gem Industries and its restricted subsidiaries may not incur additional debt (other than permitted debt in limited circumstances as defined in the indentures) unless, after giving effect to such incurrence, the consolidated interest coverage ratio of Ply Gem Industries would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio test, Ply Gem Industries and its restricted subsidiaries may only incur additional debt in limited circumstances, including, but not limited to, debt under our credit facilities not to exceed the greater of (x) $250 million less the amounts of certain prepayments or commitment reductions as a result of repayments from asset sales and (y) the borrowing base; purchase money indebtedness in an aggregate amount not to exceed $25.0 million at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries and its restricted subsidiaries are limited in their ability to make certain payments, pay dividends or make other distributions to Ply Gem Holdings. Permitted payments, dividends and distributions include, but are not limited to, those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, and to pay customary and reasonable costs and expenses of an offering of securities that is not consummated.

The 8.25% Senior Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than the assets securing the Company’s obligations under the ABL Facility, which consist of accounts receivable, inventory, cash, deposit accounts, securities accounts, chattel paper and proceeds of the foregoing and certain assets such as contract rights, instruments and documents related thereto) of Ply Gem Industries and the Guarantors and on a second-priority lien basis by the assets that secure the ABL Facility.

In addition, the Company’s stock ownership in the Company’s subsidiaries collateralizes the 8.25% Senior Secured Notes to the extent that such equity interests and other securities can secure the 8.25% Senior Secured Notes without Rule 3-16 of Regulation S-X under the Securities Act requiring separate financial statements of such subsidiary to be filed with the Securities and Exchange Commission (“SEC”). As of March 30, 2013, no subsidiary’s stock has been excluded from the collateral arrangement due to the Rule 3-16 requirement.

On August 4, 2011, Ply Gem Industries completed its exchange offer with respect to the 8.25% Senior Secured Notes issued in February 2011 by exchanging $800.0 million 8.25% Senior Secured Notes, which were registered under the Securities Act, for $800.0 million of the issued and outstanding 8.25% Senior Secured Notes. Upon completion of the exchange offer, all $800.0 million of issued and outstanding 8.25% Senior Secured Notes were registered under the Securities Act. However, the $40.0 million of Senior Tack-on Notes issued in February 2012 have not been registered under the Securities Act and there is no contractual requirement to register these instruments.

 

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Senior Secured Asset Based Revolving Credit Facility due 2016

On January 26, 2011, Ply Gem Industries, Ply Gem Holdings and the subsidiaries of Ply Gem Industries entered into a new ABL Facility. Ply Gem Industries and Ply Gem Canada used the initial borrowing under the new ABL Facility to repay all of the outstanding indebtedness (including all accrued interest) under the Senior Secured Asset-Based Revolving Credit Facility due 2013. The new ABL Facility initially provided for revolving credit financing of up to $175.0 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans, and borrowings in Canadian dollars and U.S. dollars by Ply Gem Canada. In August 2011, the Company exercised the accordion feature under the new ABL Facility for $37.5 million, or 50% of the eligible accordion, increasing the Company’s ABL Facility from $175.0 million to $212.5 million. Under the terms of the ABL Facility, the Company has the ability to further increase the revolving commitments up to another $37.5 million to $250.0 million. Under the amended ABL Facility, $197.5 million is available to Ply Gem Industries and $15.0 million is available to Ply Gem Canada. All outstanding loans under the new ABL Facility are due and payable in full on January 26, 2016.

Borrowings under the new ABL Facility bear interest at a rate per annum equal to, at Ply Gem Industries’ option, either (a) a base rate determined by reference to the higher of (1) the corporate base rate of the administrative agent and (2) the federal funds effective rate plus 0.5% or (b) a Eurodollar rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin. The initial applicable margin for borrowings under the new ABL Facility was 1.50% for base rate loans and 2.50% for Eurodollar rate loans. The applicable margin for borrowings under the new ABL Facility is subject to step ups and step downs based on average excess availability under that facility. Swingline loans bear interest at a rate per annum equal to the base rate plus the applicable margin.

In addition to paying interest on outstanding principal under the new ABL Facility, Ply Gem Industries is required to pay a commitment fee, in respect of the unutilized commitments thereunder, which fee will be determined based on utilization of the new ABL Facility (increasing when utilization is low and decreasing when utilization is high). Ply Gem Industries must also pay customary letter of credit fees equal to the applicable margin on Eurodollar loans and agency fees. The new ABL Facility eliminated the interest rate floor that existed in the prior ABL Facility. As of March 30, 2013, the Company’s interest rate on the new ABL Facility was approximately 2.5%. The new ABL Facility contains a requirement to maintain a fixed charge coverage ratio of 1.0 to 1.0 if the Company’s excess availability is less than the greater of (a) 12.5% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $17.5 million. The new ABL Facility also contains a cash dominion requirement if the Company’s excess availability is less than the greater of (a) 15.0% of the lesser of (i) the commitments and (ii) the borrowing base and (b) $20.0 million (or $17.5 million for the months of January, February, and March). The fixed charge coverage ratio is calculated as the ratio of (i) the Company’s Adjusted EBITDA, as defined in the credit agreement governing the ABL Facility, less the aggregate amount of capital expenditures less taxes paid or payable in cash to (ii) the Company’s interest expense plus certain mandatory principal payments plus restricted payments, each as defined in the credit agreement governing the ABL Facility. Since the inception of the new ABL Facility in 2011, the Company has not been required to meet the fixed charge coverage ratio as the Company’s excess availability has exceeded the minimum thresholds.

All obligations under the ABL Facility are unconditionally guaranteed by Ply Gem Holdings and substantially all of Ply Gem Industries’ existing and future, direct and indirect, wholly owned

 

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domestic subsidiaries. All obligations under the ABL Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Ply Gem Industries and the guarantors, including a first-priority security interest in personal property consisting of accounts receivable, inventory, cash, deposit accounts, and certain related assets and proceeds of the foregoing and a second-priority security interest in, and mortgages on, substantially all of Ply Gem Industries’ and the Guarantors’ material owned real property and equipment and all assets that secure the 8.25% Senior Secured Notes on a first-priority basis. In addition to being secured by the collateral securing the obligations of Ply Gem Industries under the domestic collateral package, the obligations of Ply Gem Canada, which is a borrower under the Canadian sub-facility under the new ABL Facility, are also secured by a first-priority security interest in substantially all of the assets of such Canadian subsidiary, plus additional mortgages in Canada, and a pledge by Ply Gem Industries of the remaining 35% of the equity interests of Ply Gem Canada pledged only to secure the Canadian sub-facility.

The ABL Facility contains certain covenants that limit the Company’s ability and the ability of the Company’s subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets. In particular, the Company is permitted to incur additional debt in limited circumstances, including senior secured notes in an aggregate principal amount not to exceed $875.0 million, permitted subordinated indebtedness in an aggregate principal amount not to exceed $75.0 million at any time outstanding (subject to the ability to incur additional permitted subordinated debt provided that immediately after giving effect to such incurrence excess availability is more than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the fixed charge coverage ratio), purchase money indebtedness in an aggregate amount not to exceed $15.0 million at any one time outstanding, debt of foreign subsidiaries (other than Canadian subsidiaries) in an aggregate amount not to exceed $2.5 million at any one time outstanding, and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of its officers (including approximately $12.6 million of repurchases from certain executive officers), directors or employees under certain circumstances, to pay taxes, to pay operating and other corporate overhead costs and expenses in the ordinary course of business in an aggregate amount not to exceed $2.0 million in any calendar year plus reasonable and customary indemnification claims of its directors and executive officers and to pay fees and expenses related to any unsuccessful debt or equity offering. Ply Gem Industries may also make additional payments to Ply Gem Holdings that may be used by Ply Gem Holdings to pay dividends or other distributions on its stock under the new ABL Facility so long as before and after giving effect to such dividend or other distribution excess availability is greater than 25% of the lesser of the total borrowing base and the aggregate commitments and Ply Gem Industries is in pro forma compliance with the consolidated fixed charge coverage ratio.

On September 21, 2012, Ply Gem Industries completed an amendment to its ABL Facility to permit the refinancing of its 13.125% Senior Subordinated Notes with unsecured notes rather than subordinated notes. No other terms or provisions were modified or changed in conjunction with this amendment.

As of March 30, 2013, Ply Gem Industries had approximately $141.1 million of contractual availability and approximately $97.1 million of borrowing base availability under the new ABL Facility, reflecting $65.0 million of borrowings outstanding and approximately $6.4 million of letters of credit and priority payables reserves.

 

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On April 3, 2013, Ply Gem Industries amended its ABL facility. Among other things, the amendment to the ABL Facility: (i) increased the amount of debt that Ply Gem Holdings is permitted to incur under the tax receivables agreement from $65.0 million to $100.0 million subject to the satisfaction of certain conditions, including the Company maintaining excess availability levels, greater than the lesser of (x) 25% of the lesser of the borrowing base and aggregate commitments and (y) $17.5 million, and (ii) modified the change of control definition.

9.375% Senior Notes due 2017

On September 27, 2012, Ply Gem Industries issued $160.0 million of 9.375% Senior Notes at par. Ply Gem Industries used the proceeds of the offering, together with cash on hand, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. The 9.375% Senior Notes will mature on April 15, 2017 and bear interest at the rate of 9.375% per annum. Interest will be paid semi-annually on April 15 and October 15 of each year. A portion of the early call premium and the original unamortized discount on the 13.125% Senior Subordinated Notes was recorded as a discount on the $160.0 million of 9.375% Senior Notes, given that the transaction was predominately accounted for as a loan modification.

Prior to October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2014, Ply Gem Industries may redeem up to 40% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 109.375% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any, provided that at least 60% of the aggregate principal amount of the 9.375% Senior Notes remains outstanding after the redemption and the redemption occurs within 90 days of the date of the closing of such equity offerings. On or after October 15, 2014, and prior to October 15, 2015, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 103% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. On or after October 15, 2015 and prior to October 15, 2016, Ply Gem Industries may redeem up to 100% of the aggregate principal amount of the 9.375% Senior Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 100% of the aggregate principal amount of the 9.375% Senior Notes, plus accrued and unpaid interest, if any to the redemption date. At any time on or after October 15, 2014, Ply Gem Industries may redeem the 9.375% Senior Notes, in whole or in part, at the declining redemption prices set forth in the indenture governing the 9.375% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date.

The 9.375% Senior Notes are unsecured and equal in right of payment to all of our existing and future senior debt, including the ABL Facility and the 8.25% Senior Secured Notes. The 9.375% Senior Notes are unconditionally guaranteed on a joint and several basis by the Guarantors (other than certain unrestricted subsidiaries) on a senior unsecured basis. The guarantees are general unsecured obligations and are equal in right of payment to all existing senior debt of the Guarantors, including their guarantees of the 8.25% Senior Secured Notes and the ABL Facility. The 9.375% Senior Notes and guarantees are effectively subordinated to all of Ply Gem Industries’ and the guarantors’ existing and future secured indebtedness, including the 8.25% Senior Secured Notes and the ABL Facility, to the extent of the value of the assets securing such indebtedness.

 

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The indenture governing the 9.375% Senior Notes contains certain covenants that limit the ability of Ply Gem Industries and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem their stock, make loans and investments, sell assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell Ply Gem Industries’ assets. In particular, Ply Gem Industries may not incur additional debt (other than permitted debt in limited circumstances as defined in the indenture) unless, after giving effect to such incurrence, the consolidated interest coverage ratio would be at least 2.00 to 1.00. In the absence of satisfying the consolidated interest coverage ratio, Ply Gem Industries may only incur additional debt in limited circumstances, including, but not limited to, debt not to exceed the sum of (a) the greater of (i) $250.0 million and (ii) the borrowing base as of date of such incurrence; purchase money indebtedness in an aggregate amount not to exceed the greater of $35.0 million and 20% of consolidated net tangible assets at any one time outstanding; debt of foreign subsidiaries in an aggregate amount not to exceed $30.0 million at any one time outstanding; debt pursuant to a general debt basket in an aggregate amount not to exceed $50.0 million at any one time outstanding; and the refinancing of other debt under certain circumstances. In addition, Ply Gem Industries is limited in its ability to pay dividends or make other distributions to Ply Gem Holdings. Permitted dividends and distributions include those used to redeem equity of officers, directors or employees under certain circumstances, to pay taxes, to pay out-of-pocket costs and expenses in an aggregate amount not to exceed $2.0 million in any calendar year, to pay customary and reasonable costs and expenses of an offering of securities that is not consummated and other dividends or distributions of up to $20.0 million.

On January 24, 2013, Ply Gem Industries completed its exchange offer with respect to the 9.375% Senior Notes by exchanging $160.0 million 9.375% Senior Notes, which were registered under the Securities Act, for $160.0 million of the issued and outstanding 9.375% Senior Notes. Upon completion of the exchange offer, all $160.0 million of issued and outstanding 9.375% Senior Notes were registered under the Securities Act.

13.125% Senior Subordinated Notes due 2014

On January 11, 2010, Ply Gem Industries issued $150.0 million of 13.125% Senior Subordinated Notes at an approximate 3.0% discount, yielding proceeds of approximately $145.7 million. Ply Gem Industries used the proceeds of the offering to redeem approximately $141.2 million aggregate principal amount of its previous 9% Senior Subordinated Notes due 2012 and to pay certain related costs and expenses. The interest rate on the Senior Subordinated Notes was 13.125% and was paid semi-annually on January 15 and July 15 of each year.

On September 27, 2012, Ply Gem Industries used the net proceeds from the issuance of the 9.375% Senior Notes, together with cash on hand, aggregating $165.4 million, to satisfy and discharge its obligations under the 13.125% Senior Subordinated Notes and the indenture governing the 13.125% Senior Subordinated Notes. In addition, on September 27, 2012, Ply Gem Industries issued a notice of redemption to redeem all of the outstanding 13.125% Senior Subordinated Notes on October 27, 2012 at a redemption price equal to 106.5625% plus accrued and unpaid interest to the redemption date. The $165.4 million deposited with the trustee for the 13.125% Senior Subordinated Notes included a $9.8 million call premium and $5.7 million of accrued interest. On October 27, 2012, the Company completed the redemption of all $150.0 million principal amount of the 13.125% Senior Subordinated Notes.

 

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6. Pension plans

The Company has two pension plans, the Ply Gem Group Pension Plan and the MW Manufacturers, Inc. Retirement Plan. The Company’s net periodic benefit expense for the combined plans for the periods indicated consists of the following components:

 

      For the three months ended  
(amounts in thousands)    March 30, 2013     March 31, 2012  

 

 

Service cost

   $ 29      $   

Interest cost

     440        467   

Expected return on plan assets

     (513     (504

Amortization of loss

     234        200   
  

 

 

 

Net periodic benefit expense

   $ 190      $ 163   

 

 

7. Commitments and contingencies

Indemnifications

In connection with the Ply Gem acquisition, in which Ply Gem Industries was acquired from Nortek in February 2004, Nortek has agreed to indemnify the Company for certain liabilities as set forth in the stock purchase agreement governing the Ply Gem acquisition. In the event Nortek is unable to satisfy amounts due under these indemnifications, the Company would be liable. The Company believes that Nortek has the financial capacity to honor its indemnification obligations and therefore does not anticipate incurring any losses related to liabilities indemnified by Nortek under the stock purchase agreement. A receivable related to this indemnification has been recorded in other long-term assets of approximately $3.3 million and $3.4 million at March 30, 2013 and December 31, 2012, respectively. As of March 30, 2013 and December 31, 2012, the Company has recorded liabilities related to these indemnifications of approximately $0.4 million and $0.4 million, respectively, in current liabilities and $2.9 million and $3.0 million, respectively, in long-term liabilities, consisting of the following:

 

(amounts in thousands)    March 30,
2013
     December 31,
2012
 

 

 

Product claim liabilities

   $ 146       $ 218   

Multiemployer pension plan withdrawal liability

     2,552         2,615   

Other

     587         578   
  

 

 

 
   $ 3,285       $ 3,411   

 

 

Warranty claims

The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. The Company estimates the costs that may be incurred under their warranties and records a liability for such costs at the time of sale. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. As of March 30, 2013 and December 31, 2012, warranty liabilities of approximately $7.9 million and $8.3 million, respectively, have been recorded in current liabilities and approximately $29.8 million and $29.5 million, respectively, have been recorded in long term liabilities.

 

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Changes in the Company’s short-term and long-term warranty liabilities are as follows:

 

      For the three months ended  
(amounts in thousands)     March 30, 2013     March 31, 2012  

 

 

Balance, beginning of period

   $ 37,870      $ 38,612   

Warranty expense during period

     2,519        2,570   

Settlements made during period

     (2,681     (2,402
  

 

 

 

Balance, end of period

   $ 37,708      $ 38,780   

 

 

Environmental

In 2011, MW Manufacturers Inc. (“MW”), a subsidiary of MWM Holding, entered into an Administrative Order on Consent with the United States Environmental Protection Agency (“EPA”), Region III, under Section 3008(h) of the Resource Conservation and Recovery Act (RCRA), primarily relating to contamination associated with an underground storage tank formerly located at its Rocky Mount, Virginia property. During 2011, as part of the Administrative Order on Consent, the Company provided the EPA with a preliminary cost estimate of approximately $1.8 million over the remediation period, which is estimated through 2023. The Company has recorded approximately $0.3 million of this environmental liability within current liabilities and approximately $1.5 million within other long-term liabilities in the Company’s condensed consolidated balance sheet at March 30, 2013 and December 31, 2012. The Company will adjust this environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.

Certain liabilities for this subject contamination have been previously assumed by U.S. Industries, Inc., pursuant to its indemnity obligation under the stock purchase agreement dated August 11, 1995, whereby U.S. Industries, Inc. sold the stock of MW to Fenway Partners. As the successor-in-interest of Fenway Partners, the Company is similarly indemnified by U.S. Industries, Inc. The Company’s ability to seek indemnification from U.S. Industries is, however, limited by the terms of the indemnity as well as the strength of U.S. Industries’ financial condition, which could change in the future. As of March 30, 2013, no recovery has been recognized on the Company’s condensed consolidated balance sheet but the Company will actively pursue the validity of this indemnity in future periods and will recognize future recoveries in the period in which they become probable.

The Company is currently investigating certain assumptions and calculations used in the permit development for the Title V semi-annual monitoring report for our Rocky Mount, Virginia facility air permit. Based on current information, the Company is not aware of any compliance obligations, claims, releases or investigations that will have a material adverse effect on our results of operations, cash flows or financial position. However, there can be no guarantee that previously known or newly-discovered matters or any inability to enforce our available indemnification rights against previous owners of the Company’s subsidiaries will not result in material costs or liabilities.

Self-insured risks

The Company maintains a broad range of insurance policies which include general liability insurance coverage and workers compensation. These insurance policies protect the Company against a portion of the risk of loss from claims. However, the Company retains a portion of the

 

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overall risk for such claims through its self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits. The Company’s general liability insurance includes coverage for certain damages arising out of product design and manufacturing defects. The Company’s insurance coverage is subject to a per occurrence retention.

The Company reserves for costs associated with claims, as well as incurred but not reported losses (“IBNR”), based on an outside actuarial analysis of its historical claims. These estimates make up a significant portion of the Company’s liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in type of claims, claims reporting and resolution patterns, frequency and timing of claims, third party recoveries, estimates of claim values, claims management expenses (including legal fees and expert fees), insurance industry practices, the regulatory environment, and legal precedent. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

Litigation

During 2012 and 2013, the Company incurred increased litigation expense primarily related to the claims discussed below. While the Company believes it has valid defenses to these claims and will vigorously defend these claims, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.

In John Gulbankian and Robert D. Callahan v. MW Manufacturers, Inc., a purported class action filed in March 2010 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s V-Wood windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has been scheduled for October 2013. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Eric Hartshorn and Bethany Perry v. MW Manufacturers, Inc., a purported class action filed in July 2012 in the United States District Court for the District of Massachusetts, plaintiffs, on behalf of themselves and all others similarly situated, allege damages as a result of the defective design and manufacture of MW’s Freedom and Freedom 800 windows. The plaintiffs seek a variety of relief, including (i) economic and compensatory damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Anthony Pagliaroni v. Mastic Home Exteriors, Inc. and Deceuninck North America, LLC, a purported class action filed in January 2012 in the United States District Court for the District of Massachusetts, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the defective design and manufacture of Oasis composite deck and railing, which was manufactured by Deceuninck North America, LLC (“Deceuninck”) and sold by MHE. The plaintiff seeks a variety of relief, including (i) economic and compensatory damages, (ii) treble damages,

 

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(iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. This action is currently in discovery regarding class certification, and a hearing regarding class certification has not yet been scheduled. The damages sought in this action have not yet been quantified. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim. Deceuninck, as the manufacturer of Oasis deck and railing, has agreed to indemnify the Company for certain liabilities related to this claim pursuant to the sales and distribution agreement, as amended, between Deceuninck and MHE. The Company’s ability to seek indemnification from Deceuninck is, however, limited by the terms of the indemnity as well as the strength of Deceuninck’s financial condition, which could change in the future.

In The Muhler Company, Inc. v. Ply Gem Prime Holdings, Inc. et al., a lawsuit filed in April 2011 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff, alleges unfair competition and trade practices. The plaintiff seeks a variety of relief, including (i) consequential damages, (ii) treble damages, (iii) punitive damages, and (iv) attorneys’ fees and costs of litigation. This action was dismissed by the Court in April 2013 after granting the Company’s motion for summary judgment with respect to the federal Lanham Act claims. The plaintiff filed a notice of appeal in May 2013. The damages sought in this action have not yet been quantified. The Company believes it has valid defenses to this claim, and it will vigorously defend this claim.

In Karl Memari v. Ply Gem Prime Holdings, Inc. et al., a purported class action filed in March 2013 in the United States District Court for the District of South Carolina, Charleston Division, plaintiff, on behalf of himself and all others similarly situated, alleges damages as a result of the illegality and/or defects of MW’s vinyl clad windows. The plaintiff seeks a variety of relief, including (i) actual and compensatory damages, (ii) punitive damages, and (iii) attorneys’ fees and costs of litigation. The damages sought in this action have not yet been quantified. This action is at a preliminary stage, and the Company believes it has valid defenses to this claim and will vigorously defend this claim.

Other contingencies

The Company is subject to other contingencies, including legal proceedings and claims arising out of its businesses that cover a wide range of matters, including, among others, environmental matters, contract and employment claims, personal injury, product liability, warranty, and modification, adjustment or replacement of component parts or units sold, which may include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in their products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made.

 

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8. Accrued expenses and other long-term liabilities

Accrued expenses consist of the following at March 30, 2013 and December 31, 2012:

 

(amounts in thousands)    March 30,
2013
     December 31,
2012
 

 

 

Insurance

   $ 3,359       $ 3,499   

Employee compensation and benefits

     6,278         5,745   

Sales and marketing

     24,155         23,939   

Product warranty

     7,915         8,336   

Accrued freight

     1,655         890   

Accrued interest

     15,937         30,465   

Accrued environmental liability

     470         473   

Accrued pension

     1,141         1,141   

Accrued sales returns and discounts

     3,071         2,201   

Accrued taxes

     4,349         3,035   

Other

     11,588         14,194   
  

 

 

 
   $ 79,918       $ 93,918   

 

 

Other long-term liabilities consist of the following at March 30, 2013 and December 31, 2012:

 

(amounts in thousands)    March 30,
2013
     December 31,
2012
 

 

 

Insurance

   $ 1,883       $ 1,593   

Pension liabilities

     13,817         14,139   

Multi-employer pension withdrawal liability

     2,552         2,615   

Product warranty

     29,793         29,534   

Long-term product claim liability

     146         218   

Long-term environmental liability

     1,824         1,824   

Liabilities for tax uncertainties

     3,248         3,454   

Other

     7,456         7,267   
  

 

 

 
   $ 60,719       $ 60,644   

 

 

Long-term incentive plan

During the year ended December 31, 2011, the Company finalized a long-term incentive plan (“LTIP”) for certain employees. The long-term incentive plan was implemented to retain and incentivize employees through the downturn in the housing market. During the three months ended March 30, 2013 and March 31, 2012, the Company recognized a LTIP expense of $0.5 million and $0.5 million, respectively, which has been recorded within selling, general, and administrative expenses in the condensed consolidated statement of operations and comprehensive loss. The LTIP liability is $3.3 million and $2.8 million as of March 30, 2013 and December 31, 2012, respectively, of which $0.9 million and $0.0 million has been recorded within other current liabilities and $2.4 million and $2.8 million in other long-term liabilities in the condensed consolidated balance sheets as of March 30, 2013 and December 31, 2012, respectively.

 

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Other liabilities

During the three months ended March 30, 2013 and March 31, 2012, the Company made approximately $0.5 million and $0.0 million, in cash payments on restructuring liabilities, respectively. These payments were for product simplification costs incurred for the Windows and Doors segment.

9. Income taxes

Effective tax rate and debt transactions

Under FASB Accounting Standards Codification 740-270, “Income Taxes—Interim Reporting,” each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective rate. Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company calculates its quarterly tax provision consistent with the guidance provided by ASC 740-270, whereby the Company forecasts its estimated annual effective tax rate then applies that rate to its year-to-date pre-tax book (loss) income. In addition, we exclude jurisdictions with a projected loss for the year or the year-to-date loss where we cannot recognize a tax benefit from our estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections. In addition to the tax resulting from applying the estimated annual effective tax rate to pre-tax income (loss), the Company included certain items treated as discrete events to arrive at an estimated effective tax rate. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods in accordance with ASC 740-720.

For the three months ended March 30, 2013, the Company’s estimated effective income tax rate was approximately 16.7%, which varied from the statutory rate primarily due to state income tax expense, valuation allowance, tax contingencies, and foreign income taxes. The effective tax rate including discrete items was 15.9%. The tax expense for the three months ended March 30, 2013 is approximately $3.8 million.

On February 16, 2012, Ply Gem issued an additional $40.0 million aggregate principal amount of 8.25% Senior Secured Notes in a private placement transaction. The notes will mature on February 15, 2018 and are secured by substantially all assets of Ply Gem Industries and the Guarantors. The Senior Tack-on Notes were issued at a discount yielding net proceeds of approximately $34.0 million, prior to debt issuance costs. As a result of the discount, the Senior Tack-on Notes are subject to the Applicable High Yield Discount Obligation (“AHYDO”) rules. Consequently, no portion of the original issue discount (OID) will be deductible for income tax purposes in the future.

Valuation allowance

As of March 30, 2013, a full valuation allowance has been provided against certain deferred tax assets as it is presently deemed more likely than not that the benefit of such net tax assets will not be utilized. Due to recent cumulative losses incurred by the Company, management did not rely upon projections of future taxable income in assessing the recoverability of deferred tax assets. The Company currently has book goodwill of approximately $19.3 million that is not amortized, which results in a deferred tax liability of approximately $5.5 million at March 30, 2013. Therefore, the reversal of deferred tax liabilities related to this goodwill is not considered a

 

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source of future taxable income in assessing the realization of its deferred tax assets. The Company continues to evaluate its ability to realize the net deferred tax assets and its estimates are subject to change.

Tax uncertainties

Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the condensed consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company’s state income tax returns are currently under examination by various state taxing authorities. During the three months ended March 30, 2013, the Company decreased its tax contingency reserve by approximately $0.2 million as a result of the effective settlement of a state income tax audit partially offset by additional interest accrued on existing uncertain tax positions.

Other

As of March 30, 2013, the Company has not established U.S. deferred taxes on approximately $21.3 million of unremitted earnings of the Company’s foreign subsidiary, Ply Gem Canada. Notwithstanding the provisions within the American Jobs Creation Act of 2004, the Company continues to consider these amounts to be permanently invested.

On December 23, 2011, the U.S. Treasury Department issued comprehensive temporary and proposed regulations addressing the treatment of expenditures related to tangible property for tax purposes. The Company has begun to evaluate the changes necessary to comply with the regulations and the related administrative procedures and is not currently aware of any adjustments that would be material to the Company’s consolidated financial statements.

10. Stock-based compensation

A rollforward of stock options outstanding during the three months ended March 30, 2013 is presented below:

 

      Stock
options
    Weighted-
average
exercise
price
     Weighted-
average
remaining
contractual
term (years)
 

 

 

Balance at January 1, 2013

     524,344      $ 70.16         5.95   

Granted

                      

Forfeited or expired

     (1,500          
  

 

 

      

Balance at March 30, 2013

     522,844      $ 70.33         5.70   

 

 

As of March 30, 2013, 156,994 options were 100% vested. At March 30, 2013, the Company had approximately $4.2 million of total unrecognized compensation expense that will be recognized over the weighted average period of 2.74 years.

 

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Other share-based compensation

Upon completion of each of the Ply Gem acquisition, MW acquisition and Alenco acquisition, certain members of management made a cash contribution to Ply Gem Prime Holdings in exchange for shares of Ply Gem Prime Holdings’ common stock. Ply Gem Prime is the sole shareholder of Ply Gem Holdings.

A rollforward of Ply Gem Prime’s common stock during the three months ended March 30, 2013 is as follows:

 

      Common
stock shares
owned by
management
 

 

 

Balance at January 1, 2013

     454,672   

Shares issued

       

Shares repurchased

       
  

 

 

 

Balance at March 30, 2013

     454,672   

 

 

Restricted stock

During January 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors. These shares vested over the 2012 calendar period and the Company expensed these items as compensation expense ratably during 2012. During the three months ended March 31, 2012, the Company expensed $45,000, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive loss.

During December 2012, the Company issued 600 restricted shares of common stock of Ply Gem Prime to each of three independent members of the Board of Directors. These shares will vest over the 2012 through 2013 twelve month period and the Company is expensing these items ratably over the twelve month period up to the vesting date. During the three months ended March 30, 2013, the Company expensed $45,000, related to these grants in selling, general, and administrative expenses within the condensed consolidated statement of operations and comprehensive loss.

11. Segment information

The Company defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Company has two reportable segments: 1) Siding, Fencing and Stone and 2) Windows and Doors.

The income before income taxes of each segment includes the revenue generated on transactions involving products within that segment less identifiable expenses. Unallocated income and expenses include items which are not directly attributed to or allocated to either of the Company’s reporting segments. Such items include interest, legal costs, corporate payroll, and unallocated finance, and accounting expenses. Unallocated corporate assets include cash and certain receivables. Interest expense is presented net of interest income.

 

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Following is a summary of the Company’s segment information:

 

      For the three months ended  
(amounts in thousands)    March 30,
2013
    March 31,
2012
 

 

 

Net sales

    

Siding, Fencing and Stone

   $ 137,725      $ 142,787   

Windows and Doors

     119,372        96,389   
  

 

 

 
   $ 257,097      $ 239,176   
  

 

 

 

Operating earnings (loss)

    

Siding, Fencing and Stone

   $ 17,114      $ 15,949   

Windows and Doors

     (12,096     (10,396

Unallocated

     (5,590     (4,350
  

 

 

 
   $ (572   $ 1,203   

 

 

 

      Total assets as of  
     March 30,
2013
     December 31,
2012
 

 

 

Total assets

     

Siding, Fencing and Stone

   $ 586,339       $ 558,501   

Windows and Doors

     277,836         271,650   

Unallocated

     41,941         51,699   
  

 

 

 
   $ 906,116       $ 881,850   

 

 

12. Related party transactions

Under the General Advisory Agreement (the “General Advisory Agreement”) the Company entered into with CI Capital Partners, formerly Caxton-Iseman Capital LLC, CI Capital Partners provides the Company with acquisition and financial advisory services as the Board of Directors shall reasonably request. Under the General Advisory Agreement the Company paid and expensed, as a component of selling, general, and administrative expenses, a management fee of approximately $0.2 million, and $0.3 million, for the three months ended March 30, 2013 and March 31, 2012, respectively.

During 2012, the Company and CI Capital Partners amended the General Advisory Agreement to, among other things, extend the term for a period of ten years to November 6, 2022. If the General Advisory Agreement is terminated for any reason prior to the end of the initial term, Ply Gem Industries will pay to CI Capital Partners an amount equal to the present value of the annual advisory fees that would have been payable through the end of the term or three years, whichever is less, based on the Company’s cost of funds to borrow amounts under the Company’s senior credit facilities.

In May 2013, the Company finalized an agreement with the Company’s President and Chief Executive Officer providing a one-time cash bonus of $1.5 million upon the successful completion of an initial public offering prior to December 31, 2013, subject to his continued employment with the Company through this date. This bonus agreement was made in lieu of any benefits that the President and Chief Executive Officer would have received under the tax receivable agreement.

 

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13. Subsequent event

On April 9, 2013, the Company, through its wholly-owned Canadian subsidiary Gienow Canada Inc., acquired Gienow WinDoor Ltd. for consideration of approximately CAD $21.0 million, subject to certain purchase price adjustments, through the purchase of all of the capital stock of Gienow. Immediately subsequent to the acquisition, Gienow WinDoor Ltd. was amalgamated into Gienow Canada Inc. (“Gienow”). Gienow is in the business of manufacturing, distributing, and selling windows, doors, and related products and services to industrial and residential customers in Canada and the United States. Gienow has a manufacturing facility located in Calgary, Alberta, Canada.

On May 6, 2013, Ply Gem entered into a stock purchase agreement for consideration of approximately CAD $82.0 million, subject to certain purchase price adjustments, to acquire all of the capital stock of Mitten Inc., a leading manufacturer of vinyl siding and accessories in Canada.

14. Guarantor/non-guarantor

The 8.25% Senior Secured Notes and the 9.375% Senior Notes were issued by our direct 100% owned subsidiary, Ply Gem Industries, and are fully and unconditionally guaranteed on a joint and several basis by the Company and certain of Ply Gem Industries’ 100% owned subsidiaries. Accordingly, the following guarantor and non-guarantor information is presented as of March 30, 2013 and December 31, 2012, and for the three months ended March 30, 2013 and March 31, 2012. The non-guarantor information presented represents our Canadian subsidiary, Ply Gem Canada.

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statements of operations and comprehensive loss

For the three months ended March 30, 2013

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Net sales

  $      $      $ 242,683      $ 14,414      $      $ 257,097   

Cost of products sold

                  203,890        11,361               215,251   
 

 

 

 

Gross profit

                  38,793        3,053               41,846   

Operating expenses:

           

Selling, general and administrative expenses

           5,590        28,727        3,899               38,216   

Intercompany administrative charges

                  5,969        2,069        (8,038       

Amortization of intangible assets

                  4,202                      4,202   
 

 

 

 

Total operating expenses

           5,590        38,898        5,968        (8,038     42,418   
 

 

 

 

Operating loss

           (5,590     (105     (2,915     8,038        (572

Foreign currency loss

                         (33            (33

Intercompany interest

           21,075        (21,075                     

Interest expense

           (23,657     (11                   (23,668

Interest income

           1        3        11               15   

Intercompany administrative income

           8,038                      (8,038       
 

 

 

 

Loss before equity in subsidiaries’ loss

           (133     (21,188     (2,937            (24,258

Equity in subsidiaries’ income (loss)

    (28,107     (27,974                   56,081          
 

 

 

 

Loss before provision (benefit) for income taxes

    (28,107     (28,107     (21,188     (2,937     56,081        (24,258

Provision (benefit) for income taxes

                  4,644        (795            3,849   
 

 

 

 

Net income (loss)

  $ (28,107   $ (28,107   $ (25,832   $ (2,142   $ 56,081      $ (28,107
 

 

 

 

Other comprehensive income (loss):

           

Foreign currency translation adjustments

                         (768            (768
 

 

 

 

Total comprehensive loss

  $ (28,107   $ (28,107   $ (25,832   $ (2,910   $ 56,081      $ (28,875

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statements of operations and comprehensive loss

For the three months ended March 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Net sales

  $      $      $ 224,652      $ 14,524      $      $ 239,176   

Cost of products sold

                  185,067        11,194               196,261   
 

 

 

 

Gross profit

                  39,585        3,330               42,915   

Operating expenses:

           

Selling, general and administrative expenses

           4,290        26,936        3,767               34,993   

Intercompany administrative charges

                  3,034        527        (3,561       

Amortization of intangible assets

           60        6,659                      6,719   
 

 

 

 

Total operating expenses

           4,350        36,629        4,294        (3,561     41,712   
 

 

 

 

Operating earnings (loss)

           (4,350     2,956        (964     3,561        1,203   

Foreign currency gain

                         68               68   

Intercompany interest

           25,682        (25,682                     

Interest expense

           (25,055            (1            (25,056

Interest income

           1        10        4               15   

Intercompany administrative income

           3,561                      (3,561       
 

 

 

 

Loss before equity in subsidiaries’ loss

           (161     (22,716     (893            (23,770

Equity in subsidiaries’ income (loss)

    (25,642     (25,481                   51,123          
 

 

 

 

Loss before provision (benefit) for income taxes

    (25,642     (25,642     (22,716     (893     51,123        (23,770

Provision (benefit) for income taxes

                  2,105        (233            1,872   
 

 

 

 

Net loss

  $ (25,642   $ (25,642   $ (24,821   $ (660   $ 51,123      $ (25,642
 

 

 

 

Other comprehensive income (loss):

           

Foreign currency translation adjustments

                         663               663   
 

 

 

 

Total comprehensive income (loss)

  $ (25,642   $ (25,642   $ (24,821   $ 3      $ 51,123      $ (24,979

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating balance sheet

As of March 30, 2013

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
    Issuer
Ply Gem
Industries, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

ASSETS

           

Current Assets:

           

Cash and cash equivalents

  $      $ 13,441      $ (6,185   $ 3,906      $      $ 11,162   

Accounts receivable, net

                  128,107        8,446               136,553   

Inventories:

           

Raw materials

                  46,542        5,084               51,626   

Work in process

                  24,535        670               25,205   

Finished goods

                  42,769        3,110               45,879   
 

 

 

 

Total inventory

                  113,846        8,864               122,710   

Prepaid expenses and other current assets

           881        12,760        2,420               16,061   

Deferred income taxes

                  5,166        58               5,224   
 

 

 

 

Total current assets

           14,322        253,694        23,694               291,710   

Investments in subsidiaries

    (343,361     (195,017                   538,378          

Property and Equipment, at cost:

           

Land

                  3,565        172               3,737   

Buildings and improvements

                  36,838        1,584               38,422   

Machinery and equipment

           2,498        287,492        9,252               299,242   
 

 

 

 
           2,498        327,895        11,008               341,401   

Less accumulated depreciation

           (995     (233,601     (6,454            (241,050
 

 

 

 

Total property and equipment, net

           1,503        94,294        4,554               100,351   

Other Assets:

           

Intangible assets, net

                  90,153                      90,153   

Goodwill

                  383,042        9,182               392,224   

Deferred income taxes

                         2,871               2,871   

Intercompany note receivable

           856,739                      (856,739       

Other

           26,116        2,691                      28,807   
 

 

 

 

Total other assets

           882,855        475,886        12,053        (856,739     514,055   
 

 

 

 
  $ (343,361   $ 703,663      $ 823,874      $ 40,301      $ (318,361   $ 906,116   
 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

           

Current Liabilities:

           

Accounts payable

  $      $ 344      $ 75,052      $ 4,186      $      $ 79,582   

Accrued expenses

           20,425        56,413        3,080               79,918   
 

 

 

 

Total current liabilities

           20,769        131,465        7,266               159,500   

Deferred income taxes

                  13,002                      13,002   

Intercompany note payable

                  856,739               (856,739       

Other long-term liabilities

           9,999        49,823        897               60,719   

Long-term debt

           1,016,256                             1,016,256   

Commitments and contingencies

           

Stockholder’s Equity (Deficit):

           

Preferred stock

                                         

Common stock

                                         

Additional paid-in-capital

    311,490        311,490        453,289        5,763        (770,542     311,490   

(Accumulated deficit) retained earnings

    (647,747     (647,747     (680,444     21,258        1,306,933        (647,747

Accumulated other comprehensive income (loss)

    (7,104     (7,104            5,117        1,987        (7,104
 

 

 

 

Total stockholder’s (deficit) equity

    (343,361     (343,361     (227,155     32,138        538,378        (343,361
 

 

 

 
  $ (343,361   $ 703,663      $ 823,874      $ 40,301      $ (318,361   $ 906,116   

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating balance sheet

As of December 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
    Issuer
Ply Gem
Industries, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

ASSETS

           

Current Assets:

           

Cash and cash equivalents

  $      $ 23,332      $ (4,307   $ 8,169      $      $ 27,194   

Accounts receivable, net

                  107,961        7,091               115,052   

Inventories:

           

Raw materials

                  35,074        4,878               39,952   

Work in process

                  20,220        711               20,931   

Finished goods

                  35,927        3,482               39,409   
 

 

 

 

Total inventory

                  91,221        9,071               100,292   

Prepaid expenses and other current assets

           12        13,844        1,528               15,384   

Deferred income taxes

                  5,161        11               5,172   
 

 

 

 

Total current assets

           23,344        213,880        25,870               263,094   

Investments in subsidiaries

    (314,942     (212,065                   527,007          

Property and Equipment, at cost:

           

Land

                  3,565        172               3,737   

Buildings and improvements

                  36,320        1,621               37,941   

Machinery and equipment

           2,145        281,885        9,245               293,275   
 

 

 

 
           2,145        321,770        11,038               334,953   

Less accumulated depreciation

           (932     (228,596     (6,320            (235,848
 

 

 

 

Total property and equipment, net

           1,213        93,174        4,718               99,105   

Other Assets:

           

Intangible assets, net

                  94,356                      94,356   

Goodwill

                  383,042        9,413               392,455   

Deferred income taxes

                         2,981               2,981   

Intercompany note receivable

           856,739                      (856,739       

Other

           27,142        2,717                      29,859   
 

 

 

 

Total other assets

           883,881        480,115        12,394        (856,739     519,651   
 

 

 

 
  $ (314,942   $ 696,373      $ 787,169      $ 42,982      $ (329,732   $ 881,850   
 

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT)

           

Current Liabilities:

  

         

Accounts payable

  $      $ 254      $ 63,110      $ 4,433      $      $ 67,797   

Accrued expenses

           32,744        58,547        2,627               93,918   
 

 

 

 

Total current liabilities

           32,998        121,657        7,060               161,715   

Deferred income taxes

                  10,049                      10,049   

Intercompany note payable

                  856,739               (856,739       

Other long-term liabilities

           13,933        45,811        900               60,644   

Long-term debt

           964,384                             964,384   

Commitments and contingencies

           

Stockholder’s Equity (Deficit):

           

Preferred stock

                                         

Common stock

                                         

Additional paid-in-capital

    311,034        311,034        407,525        5,737        (724,296     311,034   

(Accumulated deficit) retained earnings

    (619,640     (619,640     (654,612     23,400        1,250,852        (619,640

Accumulated other comprehensive income (loss)

    (6,336     (6,336            5,885        451        (6,336
 

 

 

 

Total stockholder’s (deficit) equity

    (314,942     (314,942     (247,087     35,022        527,007        (314,942
 

 

 

 
  $ (314,942   $ 696,373      $ 787,169      $ 42,982      $ (329,732   $ 881,850   

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statement of cash flows

For the three months ended March 30, 2013

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
    Issuer
Ply Gem
Industries, Inc.
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Cash flows from operating activities:

           

Net loss

  $ (28,107   $ (28,107   $ (25,832   $ (2,142   $ 56,081      $ (28,107

Adjustments to reconcile net loss to cash used in operating activities:

           

Depreciation and amortization expense

           63        9,283        369               9,715   

Non-cash interest expense, net

           2,833                             2,833   

Loss on foreign currency transactions

                         33               33   

Stock based compensation

           456                             456   

Deferred income taxes

                  2,948        100               3,048   

Reduction in tax uncertainty, net of valuation allowance

                  (206                   (206

Equity in subsidiaries’ net loss

    28,107        27,974                      (56,081       

Other

                  (8                   (8

Changes in operating assets and liabilities:

           

Accounts receivable, net

                  (20,146     (1,183            (21,329

Inventories

                  (22,625     396               (22,229

Prepaid expenses and other current assets

           (743     1,117        (885            (511

Accounts payable

           90        11,845        (238            11,697   

Accrued expenses

           (16,253     2,728        290               (13,235

Cash payments on restructuring liabilities

                  (539                   (539

Other

                  (34     (998            (1,032
 

 

 

 

Net cash used in operating activities

           (13,687     (41,469     (4,258            (59,414

Cash flows from investing activities:

           

Capital expenditures

           (352     (6,210     (103            (6,665

Proceeds from sale of assets

                  11                      11   
 

 

 

 

Net cash used in investing activities

           (352     (6,199     (103            (6,654

Cash flows from financing activities:

           

Net revolver payments

           50,000                             50,000   

Proceeds from intercompany investment

           (45,790     45,790                        

Debt issuance costs paid

           (62                          (62
 

 

 

 

Net cash provided by financing activities

           4,148        45,790                      49,938   

Impact of exchange rate movement on cash

                         98               98   
 

 

 

 

Net decrease in cash and cash equivalents

           (9,891     (1,878     (4,263            (16,032

Cash and cash equivalents at the beginning of the period

           23,332        (4,307     8,169               27,194   
 

 

 

 

Cash and cash equivalents at the end of the period

  $      $ 13,441      $ (6,185   $ 3,906      $      $ 11,162   

 

 

 

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Ply Gem Holdings, Inc. and subsidiaries

Condensed consolidating statement of cash flows

For the three months ended March 31, 2012

 

(amounts in thousands)   Guarantor
Ply Gem
Holdings, Inc.
   

Issuer

Ply Gem
Industries, Inc.

    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiary
    Consolidating
adjustments
    Consolidated  

 

 

Cash flows from operating activities:

           

Net loss

  $ (25,642   $ (25,642   $ (24,821   $ (660   $ 51,123      $ (25,642

Adjustments to reconcile net loss to cash used in operating activities:

           

Depreciation and amortization expense

           42        13,032        243               13,317   

Non-cash interest expense, net

           2,905                             2,905   

Gain on foreign currency transactions

                         (68            (68

Stock based compensation

           376                             376   

Deferred income taxes

                  835        (29            806   

Reduction in tax uncertainty, net of valuation allowance

                  837        25               862   

Equity in subsidiaries’ net loss

    25,642        25,481                      (51,123       

Other

                  2        (3            (1

Changes in operating assets and liabilities:

           

Accounts receivable, net

                  (22,689     (17            (22,706

Inventories

                  (9,993     259               (9,734

Prepaid expenses and other current assets

           (623     2,013        (2,755            (1,365

Accounts payable

           (300     26,023        (1,762            23,961   

Accrued expenses

           (15,657     (4,287     622               (19,322

Other

                  3        93               96   
 

 

 

 

Net cash used in operating activities

           (13,418     (19,045     (4,052            (36,515

Cash flows from investing activities:

           

Capital expenditures

           (296     (2,869     (185            (3,350

Proceeds from sale of assets

                  121                      121   
 

 

 

 

Net cash used in investing activities

           (296     (2,748     (185            (3,229

Cash flows from financing activities:

           

Proceeds from long-term debt

           34,000                             34,000   

Net revolver borrowings

           15,000                             15,000   

Proceeds from intercompany investment

           (25,221     25,221                        

Debt issuance costs paid

           (866                          (866
 

 

 

 

Net cash provided by financing activities

           22,913        25,221                      48,134   

Impact of exchange rate movement on cash

                         107               107   
 

 

 

 

Net increase (decrease) in cash and cash equivalents

           9,199        3,428        (4,130            8,497   

Cash and cash equivalents at the beginning of the period

           8,578        (3,408     6,530               11,700   
 

 

 

 

Cash and cash equivalents at the end of the period

  $      $ 17,777      $ 20      $ 2,400      $      $ 20,197   

 

 

 

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LOGO


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.    Other Expenses of Issuance and Distribution.

The following sets forth the expenses and costs (other than underwriting discounts and commissions) expected to be incurred in connection with the issuance and distribution of the common stock registered hereby. Other than the SEC registration fee, the FINRA fee and the New York Stock Exchange fee, the amounts set forth below are estimates:

 

SEC registration fee

     $27,528   

FINRA fee

     30,500   

NYSE fee

     *   

Printing expenses

     *   

Accounting fees and expenses

     *   

Legal fees and expenses

     *   

Blue Sky fees and expenses

     *   

Transfer agent fees and expenses

     *   

Miscellaneous

     *   
  

 

 

 

Total

     *   

 

 

 

*   To be provided by amendment.

Item 14.    Indemnification of Directors and Officers.

Directors’ liability; indemnification of directors and officers. Section 145(a) of the Delaware General Corporation Law provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, because the person is or was a director or officer of the corporation. Such indemnity may be against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and if, with respect to any criminal action or proceeding, the person did not have reasonable cause to believe the person’s conduct was unlawful.

Section 145(b) of the Delaware General Corporation Law provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director or officer of the corporation, against any expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in

 

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which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for such expenses which the Court of Chancery or such other court shall deem proper.

Section 145(g) of the Delaware General Corporation Law provides, in general, that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation against any liability asserted against the person in any such capacity, or arising out of the person’s status as such, whether or not the corporation would have the power to indemnify the person against such liability under the provisions of the law. Our amended and restated certificate of incorporation provides that, to the fullest extent permitted by applicable law, a director will not be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director. In addition, our by-laws provide that we will indemnify each director and officer and may indemnify employees and agents, as determined by our board, to the fullest extent provided by the laws of the State of Delaware.

The foregoing statements are subject to the detailed provisions of Section 145 of the Delaware General Corporation Law and our amended and restated certificate of incorporation and by-laws.

Section 102 of the Delaware General Corporation Law permits the limitation of directors’ personal liability to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director except for (i) any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) breaches under Section 174 of the Delaware General Corporation Law, which relates to unlawful payments of dividends or unlawful stock repurchase or redemptions, and (iv) any transaction from which the director derived an improper personal benefit.

Reference is made to Item 17 for our undertakings with respect to indemnification for liabilities arising under the Securities Act.

We maintain directors’ and officers’ liability insurance for our officers and directors.

The underwriting agreement for this offering will provide that each underwriter severally agrees to indemnify and hold harmless the Company, each of our directors, each of our officers who signs the registration statement, and each person who controls the Company within the meaning of the Securities Act but only with respect to written information relating to such underwriter furnished to the Company by or on behalf of such underwriter specifically for inclusion in the documents referred to in the foregoing indemnity.

Under the Stockholders Agreement, we will agree to indemnify the CI Partnerships from any losses arising directly or indirectly out of the CI Partnerships actual, alleged or deemed control or ability to influence control of us or the actual or alleged act or omission of any director nominated by the CI Partnerships, including any act or omission in connection with this offering.

We expect to enter into an indemnification agreement with each of our executive officers and directors that provides, in general, that we will indemnify them to the fullest extent permitted by law in connection with their service to us or on our behalf.

Item 15.    Recent Sales of Unregistered Securities.

The following is a summary of our transactions within the past three years involving sales of our securities that were not registered under the Securities Act.

 

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Table of Contents

In connection with the merger described in “Certain relationships and related party transactions—Reorganization transactions,” the registrant will issue             shares of common stock based on an assumed public offering price of $             per share (the midpoint of the estimated public offering price range set forth on the cover page of the prospectus). The shares of common stock described above will be issued in reliance on the exemption provided by Section 4(2) of the Securities Act on the basis that it will not involve a public offering.

Item 16.    Exhibits and Financial Statement Schedules.

(a)  Exhibits.

The following documents are exhibits to the Registration Statement:

 

Exhibit

number

     Description

 

 

  1.1   

Form of Underwriting Agreement.

  2.1       Stock Purchase Agreement, dated as of December 19, 2003, among Ply Gem Investment Holdings, Inc., (f/k/a CI Investment Holdings, Inc.), Nortek, Inc. and WDS LLC (incorporated by reference from Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  2.2       Stock Purchase Agreement, dated as of July 23, 2004, among Ply Gem Industries, Inc., MWM Holding, Inc. and the stockholders listed on Schedule 1 thereto (incorporated by reference from Exhibit 2.2 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  2.3       Securities Purchase Agreement, dated as of February 6, 2006, among Ply Gem Industries, Inc., and all of the direct and indirect stockholders, warrant holders and stock option holders of AWC Holding Company and FNL Management Corp., an Ohio corporation, as their representative (incorporated by reference from Exhibit 2.1 on Form 8-K dated March 2, 2006 (File No. 333-114041-07)).
  2.4       Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
  2.5       First Amendment, dated as of October 31, 2006, to the Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.2 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
  2.6    Form of Agreement and Plan of Merger by and between Ply Gem Prime Holdings, Inc. and Ply Gem Holdings, Inc.
  3.1    Form of Amended and Restated Certificate of Incorporation.
  3.2    Form of Amended and Restated By-laws.
  4.1    Specimen Stock Certificate.
  4.2       Indenture, dated as of February 11, 2011, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent (incorporated by reference from Exhibit 4.20 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).

 

II-3


Table of Contents

Exhibit

number

     Description

 

 

  4.3       First Supplemental Indenture, dated as of August 2, 2012, among Ply Gem Industries, Inc., Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as trustee and noteholder collateral agent (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.4       Indenture, dated as of September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.2 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.5       Registration Rights Agreement, dated September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and UBS Securities LLC and J.P. Morgan Securities LLC, as initial purchasers (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.6       Credit Agreement, dated January 26, 2011, among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Inc., the other borrowers named therein, each lender from time to time party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, U.S. Collateral Agent and a U.S. L/C Issuer, UBS Loan Finance LLC, as U.S. Swing Line Lender, Wells Fargo Bank, National Association, as a U.S. L/C Issuer, UBS AG Canada Branch, as Canadian Administrative Agent, as Canadian Collateral Agent, as Canadian Swing Line Lender, and as a Canadian L/C Issuer, Credit Suisse, as a U.S. L/C Issuer, Credit Suisse, Toronto Branch, as a Canadian L/C Issuer, UBS Securities LLC, as Joint Lead Arranger and Joint Bookrunner, and Wells Fargo Capital Finance, LLC, as Co-Collateral Agent, Syndication Agent, Joint Lead Arranger and Joint Bookrunner (incorporated by reference from Exhibit 4.22 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.7       Amendment No. 1 to Credit Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.8       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Credit Suisse AG, Cayman Islands Branch (incorporated by reference from Exhibit 4.2 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.9       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Goldman Sachs Bank USA (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.10       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Royal Bank of Canada (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).

 

II-4


Table of Contents

Exhibit

number

     Description

 

 

  4.11       Amendment No. 2 to Credit Agreement, dated as of September 21, 2012, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.12       Amended and Restated Lien Subordination and Intercreditor Agreement, dated as of February 11, 2011, among UBS AG, Stamford Branch, as Collateral Agent, Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent, Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on Schedule I thereto (incorporated by reference from Exhibit 4.23 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.13†       Amendment No. 3 to Credit Agreement, dated as of April 3, 2013, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent.
  4.14       Intercreditor Agreement Supplement, dated as of August 2, 2012, by Foundation Labs by Ply Gem, LLC (incorporated by reference from Exhibit 4.6 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.15       Collateral Agreement, dated February 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.24 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.16       Collateral Agreement Supplement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.7 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.17       Intellectual Property Collateral Agreement, dated February 11, 2011, by Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on the Annex thereto in favor of Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.25 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.18       U.S. Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.26 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.19       Supplement to U.S. Security Agreement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.8 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).

 

II-5


Table of Contents

Exhibit

number

    Description

 

 

  4.20      U.S. Guaranty, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.27 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.21      Supplement to U.S. Guaranty, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.9 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.22      U.S. Intellectual Property Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.28 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.23      U.S. Intellectual Property Security Agreement, dated March 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as collateral Agent (incorporated by reference from Exhibit 4.29 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.24      Canadian Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.30 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.25      Canadian Intellectual Property Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.31 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  5.1   Opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP as to legality of the common stock.
  10.1 **    Amended and Restated Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
  10.2 **    Amendment to Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.3 **    Phantom Incentive Unit Award Agreement Amendment letter to Lynn Morstad, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.4 **    Phantom Incentive Unit Award Agreement Amendment letter to Michael Haley, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.6 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.5 **    Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.4 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).

 

II-6


Table of Contents

Exhibit

number

    Description

 

 

  10.6 **    Form of Incentive Stock Option Agreement for Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
  10.7 **    Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.7 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.8 **    Form of Performance Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.8 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.9 **    Form of Restricted Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.10 **    Form of Restricted Stock Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.11      General Advisory Agreement dated as of February 12, 2004, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  10.12      Amendment No. 1 to Advisory Agreement, dated as of November 6, 2012, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  10.13      Second Amended and Restated Tax Sharing Agreement dated as of March 17, 2011, and effective as of January 11, 2010, between Ply Gem Prime Holdings, Inc., Ply Gem Holdings, Inc. and Ply Gem Industries, Inc. (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  10.14   Third Amended and Restated Tax Sharing Agreement between Ply Gem Holdings, Inc. and Ply Gem Industries, Inc.
  10.15      Stock Purchase Agreement, dated as of November 22, 2002, between Alcoa Building Products, Inc., Ply Gem Industries, Inc. and Nortek, Inc. (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  10.16 **    Amended and Restated Retention Agreement with John C. Wayne, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.13 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).
  10.17 **    Letter to John C. Wayne, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.18 **    Letter to John C. Wayne, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.19 **    Amended and Restated Retention Agreement with Lynn Morstad, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.14 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).

 

II-7


Table of Contents

Exhibit

number

    Description

 

 

  10.20 **    Letter to Lynn Morstad, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.21 **    Letter to Lynn Morstad, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.22 **    Amended and Restated Retention Agreement with John Buckley, dated as of December 31, 2008.
  10.23 **    Letter to John Buckley, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement.
  10.24 **    Letter to John Buckley, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.25 **    Amended and Restated Retention Agreement with David Schmoll, dated as of December 31, 2008(incorporated by reference from Exhibit 10.20 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.26 **    Letter to David Schmoll, dated as of December 13, 2011, regarding Renewal and Amended and Restated Retention Agreement (incorporated by reference from Exhibit 10.21 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.27 **    Letter to David Schmoll, dated as of December 17, 2012, regarding Renewal and Amended and Restated Retention Agreement.
  10.28 **    Employment Agreement with Gary E. Robinette, dated as of August 14, 2006. (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.29 **    First Amendment to Employment Agreement with Gary E. Robinette, dated as of November 11, 2011(incorporated by reference from Exhibit 10.23 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.30 **    Retention Bonus Award letter to Gary E. Robinette, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
  10.31 **    Retention Bonus Award Amendment with Gary E. Robinette, dated as of May 27, 2010 (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-1 (File No. 333-167193)).
  10.32 **    Retention Bonus Award letter to Gary E. Robinette, dated as of November 11, 2011 (incorporated by reference from Exhibit 10.26 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.33 **    Amended and Restated Retention Agreement with Shawn K. Poe, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
  10.34 **    Letter to Shawn K. Poe, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.28 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.35 **    Letter to Shawn K. Poe, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.

 

II-8


Table of Contents

Exhibit

number

    Description

 

 

  10.36 **    Retention Bonus Award letter to Shawn K. Poe, dated as of November 11, 2011(incorporated by reference from Exhibit 10.29 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.37      Repurchase Agreement, dated as of November 11, 2011, between Gary E. Robinette and Ply Gem Prime Holdings, Inc. (incorporated by reference from Exhibit 10.30 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.38   Form of Registration Rights Agreement by and among Ply Gem Holdings, Inc., Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P. and other parties named therein.
  10.39   Form of Second Amended and Restated Stockholders’ Agreement by and among Ply Gem Holdings, Inc., Ply Gem Prime Holdings, Inc., Caxton-Iseman (Ply Gem), L.P., Caxton-Iseman (Ply Gem) II, L.P., the management stockholders named therein, the other investors named therein, and for purposes of certain sections only, Rajaconda Holdings, Inc.
  10.40   Form of Indemnification Agreement.
  10.41   Form of Tax Receivable Agreement by and among Ply Gem Holdings, Inc. and the Tax Receivable Entity.
  10.42†      Subscription Agreement, dated May 27, 2010, between Ply Gem Prime Holdings, Inc. and each of the investors named therein.
  10.43†      Repurchase Agreement, dated May 27, 2010, between Gary Robinette and Ply Gem Prime Holdings, Inc.
  10.44   Form of Termination Agreement between Ply Gem Industries, Inc. and CxCIC LLC.
  10.45†     

MW Manufacturers, Inc. Retirement Plan.

  10.46†     

MW Manufacturers, Inc. Supplemental Executive Retirement Plan.

  10.47 **    Letter to Gary E. Robinette, dated May 6, 2013, regarding bonus award.
  21.1      List of Subsidiaries.
  23.1      Consent of Ernst & Young LLP, independent registered public accounting firm.
  23.2   Consent of Paul, Weiss, Rifkind, Wharton & Garrison LLP (included in Exhibit 5.1 to this Registration Statement).
  24.1†      Powers of Attorney (included on signature pages of this Part II).

 

 

 

*   To be filed by amendment.

 

**   Management agreement.

 

  Previously filed.

 

(b)   Financial Statement Schedule.
       Schedule II—Valuation and Qualifying Accounts

Schedules not listed above have been omitted because information required to be set forth is not applicable or is shown in the financial statements or the notes thereto.

 

II-9


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

of Ply Gem Holdings, Inc.

We have audited the consolidated financial statements of Ply Gem Holdings, Inc. and subsidiaries as of December 31, 2012 and 2011, and for the three years in the period ended December 31, 2012, and have issued our report thereon dated March 15, 2013 (except for Note 1 — Earnings (loss) per common share, for which the date is April 5, 2013), included elsewhere in this Registration Statement. Our audits also included the financial statement schedule listed in Schedule II of this Registration Statement. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this schedule based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Raleigh, North Carolina

March 15, 2013

 

II-10


Table of Contents

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

PLY GEM HOLDINGS, INC. AND SUBSIDIARIES

December 31, 2012

 

(amounts in thousands)   

Balance at

beginning

of year

    

Charged to

costs and

expenses

    

Charged to

other

accounts

   

Uncollectible

accounts

written off, net

of recoveries

   

Balance at

end of

year

 

 

 

Year ended December 31, 2012

            

Allowance for doubtful accounts and sales allowances

   $ 3,883       $ 778       $      $ (1,077   $ 3,584   

Year ended December 31, 2011

            

Allowance for doubtful accounts and sales allowances

   $ 5,294       $ 1,501       $ (24   $ (2,888   $ 3,883   

Year ended December 31, 2010

            

Allowance for doubtful accounts and sales allowances

   $ 5,467       $ 3,193       $ (43   $ (3,323   $ 5,294   

 

 

See accompanying report of independent registered public accounting firm.

 

II-11


Table of Contents

Item 17.    Undertakings.

(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing date specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(b)  Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(c)  The undersigned registrant hereby undertakes that:

(1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-12


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant duly caused this Amendment No. 4 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cary, State of North Carolina, on May 6, 2013.

 

PLY GEM HOLDINGS, INC.

By:  

/s/    Shawn K. Poe

 

Name: Shawn K. Poe

 

Title:    Vice President, Chief Financial

Officer, Treasurer and Secretary

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 4 to the registration statement has been signed on May 6, 2013 by the following persons in the capacities indicated.

 

Signature

 

Title

*

Gary E. Robinette

 

President, Chief Executive Officer and Director

(Principal Executive Officer)

/s/    Shawn K. Poe      

Shawn K. Poe

 

Vice President, Chief Financial Officer, Treasurer and Secretary

(Principal Financial and Accounting Officer)

*

Frederick J. Iseman

  Chairman of the Board and Director

*

Robert A. Ferris

  Director

*

Steven M. Lefkowitz

  Director

*

John D. Roach

  Director

*

Michael P. Haley

  Director

*

Timothy T. Hall

  Director

*

Jeffrey T. Barber

  Director

 

*By:   

    /s/    Shawn K. Poe      

 

Shawn K. Poe

Attorney-in-Fact

 

II-13


Table of Contents

EXHIBIT INDEX

 

Exhibit

number

     Description

 

 

  1.1   

Form of Underwriting Agreement.

  2.1       Stock Purchase Agreement, dated as of December 19, 2003, among Ply Gem Investment Holdings, Inc., (f/k/a CI Investment Holdings, Inc.), Nortek, Inc. and WDS LLC (incorporated by reference from Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  2.2       Stock Purchase Agreement, dated as of July 23, 2004, among Ply Gem Industries, Inc., MWM Holding, Inc. and the stockholders listed on Schedule 1 thereto (incorporated by reference from Exhibit 2.2 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  2.3       Securities Purchase Agreement, dated as of February 6, 2006, among Ply Gem Industries, Inc., and all of the direct and indirect stockholders, warrant holders and stock option holders of AWC Holding Company and FNL Management Corp., an Ohio corporation, as their representative (incorporated by reference from Exhibit 2.1 on Form 8-K dated March 2, 2006 (File No. 333-114041-07)).
  2.4       Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
  2.5       First Amendment, dated as of October 31, 2006, to the Stock Purchase Agreement, dated as of September 22, 2006, among Ply Gem Industries, Inc., Alcoa Securities Corporation and Alcoa Inc. (incorporated by reference from Exhibit 2.2 to the Company’s Form 8-K, dated November 6, 2006 (File No. 333-114041-07)).
  2.6    Form of Agreement and Plan of Merger by and between Ply Gem Prime Holdings, Inc. and Ply Gem Holdings, Inc.
  3.1    Form of Amended and Restated Certificate of Incorporation.
  3.2    Form of Amended and Restated By-laws.
  4.1    Specimen Stock Certificate.
  4.2       Indenture, dated as of February 11, 2011, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent (incorporated by reference from Exhibit 4.20 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.3       First Supplemental Indenture, dated as of August 2, 2012, among Ply Gem Industries, Inc., Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as trustee and noteholder collateral agent (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.4       Indenture, dated as of September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.2 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.5       Registration Rights Agreement, dated September 27, 2012, among Ply Gem Industries, Inc., the Guarantors party thereto and UBS Securities LLC and J.P. Morgan Securities LLC, as initial purchasers (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).


Table of Contents

Exhibit

number

     Description

 

 

  4.6       Credit Agreement, dated January 26, 2011, among Ply Gem Holdings, Inc., Ply Gem Industries, Inc., Ply Gem Canada, Inc., the other borrowers named therein, each lender from time to time party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, U.S. Collateral Agent and a U.S. L/C Issuer, UBS Loan Finance LLC, as U.S. Swing Line Lender, Wells Fargo Bank, National Association, as a U.S. L/C Issuer, UBS AG Canada Branch, as Canadian Administrative Agent, as Canadian Collateral Agent, as Canadian Swing Line Lender, and as a Canadian L/C Issuer, Credit Suisse, as a U.S. L/C Issuer, Credit Suisse, Toronto Branch, as a Canadian L/C Issuer, UBS Securities LLC, as Joint Lead Arranger and Joint Bookrunner, and Wells Fargo Capital Finance, LLC, as Co-Collateral Agent, Syndication Agent, Joint Lead Arranger and Joint Bookrunner (incorporated by reference from Exhibit 4.22 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  4.7       Amendment No. 1 to Credit Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.8       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Credit Suisse AG, Cayman Islands Branch (incorporated by reference from Exhibit 4.2 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.9       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Goldman Sachs Bank USA (incorporated by reference from Exhibit 4.3 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.10       Incremental Assumption Agreement, dated as of August 11, 2011, by and among Ply Gem Industries, Inc., UBS AG, Stamford Branch, and Royal Bank of Canada (incorporated by reference from Exhibit 4.4 to the Company’s Form 10-Q, dated November 14, 2011 (File No. 333-114041-07)).
  4.11       Amendment No. 2 to Credit Agreement, dated as of September 21, 2012, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent (incorporated by reference from Exhibit 4.1 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  4.12       Amended and Restated Lien Subordination and Intercreditor Agreement, dated as of February 11, 2011, among UBS AG, Stamford Branch, as Collateral Agent, Wells Fargo Bank, National Association, as Trustee and Noteholder Collateral Agent, Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on Schedule I thereto (incorporated by reference from Exhibit 4.23 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).


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Exhibit

number

     Description

 

 

    4.13 †     Amendment No. 3 to Credit Agreement, dated as of April 3, 2013, by and among Ply Gem Industries, Inc., Ply Gem Canada, Inc., Ply Gem Holdings, Inc., the other Guarantors party thereto, the Lenders party thereto, UBS AG, Stamford Branch, as U.S. Administrative Agent, and UBS AG Canada Branch, as Canadian Administrative Agent.
    4.14       Intercreditor Agreement Supplement, dated as of August 2, 2012, by Foundation Labs by Ply Gem, LLC (incorporated by reference from Exhibit 4.6 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
    4.15       Collateral Agreement, dated February 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.24 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.16       Collateral Agreement Supplement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.7 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
    4.17       Intellectual Property Collateral Agreement, dated February 11, 2011, by Ply Gem Industries, Inc., Ply Gem Holdings, Inc. and the subsidiaries of Ply Gem Industries, Inc. listed on the Annex thereto in favor of Wells Fargo Bank, National Association, as Noteholder Collateral Agent (incorporated by reference from Exhibit 4.25 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.18       U.S. Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.26 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.19       Supplement to U.S. Security Agreement, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent and Administrative Agent (incorporated by reference from Exhibit 4.8 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
    4.20       U.S. Guaranty, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., the domestic Guarantors party thereto, UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.27 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.21       Supplement to U.S. Guaranty, dated as of August 2, 2012, among Foundation Labs by Ply Gem, LLC and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.9 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
    4.22       U.S. Intellectual Property Security Agreement, dated January 26, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as Collateral Agent (incorporated by reference from Exhibit 4.28 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).


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Exhibit

number

    Description

 

 

    4.23      U.S. Intellectual Property Security Agreement, dated March 11, 2011, among Ply Gem Industries, Inc., Ply Gem Holdings, Inc., certain domestic Guarantors party thereto and UBS AG, Stamford Branch, as collateral Agent (incorporated by reference from Exhibit 4.29 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.24      Canadian Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.30 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    4.25      Canadian Intellectual Property Security Agreement, dated January 26, 2011, by Ply Gem Canada, Inc. in favor of UBS AG Canada Branch, as Canadian Collateral Agent (incorporated by reference from Exhibit 4.31 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
    5.1   Opinion of Paul, Weiss, Rifkind, Wharton & Garrison LLP as to legality of the common stock.
  10.1 **    Amended and Restated Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
  10.2 **    Amendment to Ply Gem Prime Holdings, Inc. Phantom Stock Plan, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.3 **    Phantom Incentive Unit Award Agreement Amendment letter to Lynn Morstad, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.4 **    Phantom Incentive Unit Award Agreement Amendment letter to Michael Haley, dated as of September 25, 2006. (incorporated by reference from Exhibit 10.6 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.5 **    Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan, dated as of February 24, 2006. (incorporated by reference from Exhibit 10.4 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
  10.6 **    Form of Incentive Stock Option Agreement for Ply Gem Prime Holdings, Inc. 2004 Stock Option Plan. (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-K, dated March 27, 2006 (File No. 333-114041-07)).
  10.7 **    Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.7 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.8 **    Form of Performance Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.8 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.9 **    Form of Restricted Unit Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.10 **    Form of Restricted Stock Award Agreement for Ply Gem Prime Holdings, Inc. Long Term Incentive Plan (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).


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Exhibit

number

    Description

 

 

  10.11      General Advisory Agreement dated as of February 12, 2004, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.14 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  10.12      Amendment No. 1 to Advisory Agreement, dated as of November 6, 2012, between Ply Gem Industries, Inc. and CxCIC LLC (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q, dated November 9, 2012 (File No. 333-114041-07)).
  10.13      Second Amended and Restated Tax Sharing Agreement dated as of March 17, 2011, and effective as of January 11, 2010, between Ply Gem Prime Holdings, Inc., Ply Gem Holdings, Inc. and Ply Gem Industries, Inc. (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K, dated March 21, 2011 (File No. 333-114041-07)).
  10.14   Third Amended and Restated Tax Sharing Agreement between Ply Gem Holdings, Inc. and Ply Gem Industries, Inc.
  10.15      Stock Purchase Agreement, dated as of November 22, 2002, between Alcoa Building Products, Inc., Ply Gem Industries, Inc. and Nortek, Inc. (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-4 (File No. 333-114041)).
  10.16 **    Amended and Restated Retention Agreement with John C. Wayne, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.13 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).
  10.17 **    Letter to John C. Wayne, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.18 **    Letter to John C. Wayne, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.19 **    Amended and Restated Retention Agreement with Lynn Morstad, dated as of December 31, 2008 (incorporated by reference from Exhibit 10.14 to the Company’s Form 10-K, dated March 30, 2009 (File No. 333-114041-07)).
  10.20 **    Letter to Lynn Morstad, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.15 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.21 **    Letter to Lynn Morstad, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.22 **    Amended and Restated Retention Agreement with John Buckley, dated as of December 31, 2008.
  10.23 **    Letter to John Buckley, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement.
  10.24 **    Letter to John Buckley, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.25 **    Amended and Restated Retention Agreement with David Schmoll, dated as of December 31, 2008(incorporated by reference from Exhibit 10.20 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).


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Exhibit

number

    Description

 

 

  10.26 **    Letter to David Schmoll, dated as of December 13, 2011, regarding Renewal and Amended and Restated Retention Agreement (incorporated by reference from Exhibit 10.21 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.27 **    Letter to David Schmoll, dated as of December 17, 2012, regarding Renewal and Amended and Restated Retention Agreement.
  10.28 **    Employment Agreement with Gary E. Robinette, dated as of August 14, 2006. (incorporated by reference from Exhibit 10.2 to the Company’s Form 10-Q dated November 13, 2006 (File No. 333-114041-07)).
  10.29 **    First Amendment to Employment Agreement with Gary E. Robinette, dated as of November 11, 2011(incorporated by reference from Exhibit 10.23 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.30 **    Retention Bonus Award letter to Gary E. Robinette, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
  10.31 **    Retention Bonus Award Amendment with Gary E. Robinette, dated as of May 27, 2010 (incorporated by reference from Exhibit 10.18 to the Company’s Registration Statement on Form S-1 (File No. 333-167193)).
  10.32 **    Retention Bonus Award letter to Gary E. Robinette, dated as of November 11, 2011 (incorporated by reference from Exhibit 10.26 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.33 **    Amended and Restated Retention Agreement with Shawn K. Poe, dated as of November 7, 2008 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-Q, dated November 10, 2008 (File No. 333-114041-07)).
  10.34 **    Letter to Shawn K. Poe, dated as of December 13, 2011, regarding Renewal of Amended and Restated Retention Agreement(incorporated by reference from Exhibit 10.28 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.35 **    Letter to Shawn K. Poe, dated as of December 17, 2012, regarding Renewal of Amended and Restated Retention Agreement.
  10.36 **    Retention Bonus Award letter to Shawn K. Poe, dated as of November 11, 2011(incorporated by reference from Exhibit 10.29 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.37      Repurchase Agreement, dated as of November 11, 2011, between Gary E. Robinette and Ply Gem Prime Holdings, Inc. (incorporated by reference from Exhibit 10.30 to the Company’s Form 10-K dated March 16, 2012 (File No. 333-114041-07)).
  10.38   Form of Registration Rights Agreement by and among Ply Gem Holdings, Inc., Caxton-Iseman (Ply Gem), L.P. and Caxton-Iseman (Ply Gem) II, L.P. and other parties named therein.
  10.39   Form of Second Amended and Restated Stockholders’ Agreement by and among Ply Gem Holdings, Inc., Ply Gem Prime Holdings, Inc., Caxton-Iseman (Ply Gem), L.P., Caxton-Iseman (Ply Gem) II, L.P., the management stockholders named therein, the other investors named therein, and for purposes of certain sections only, Rajaconda Holdings, Inc.
  10.40   Form of Indemnification Agreement.


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Exhibit

number

    Description

 

 

  10.41   Form of Tax Receivable Agreement by and among Ply Gem Holdings, Inc. and the Tax Receivable Entity.
  10.42†      Subscription Agreement, dated May 27, 2010, between Ply Gem Prime Holdings, Inc. and each of the investors named therein.
  10.43†      Repurchase Agreement, dated May 27, 2010, between Gary Robinette and Ply Gem Prime Holdings, Inc.
  10.44   Form of Termination Agreement between Ply Gem Industries, Inc. and CxCIC LLC.
  10.45†      MW Manufacturers, Inc. Retirement Plan.
  10.46†      MW Manufacturers, Inc. Supplemental Executive Retirement Plan.
  10.47 **    Letter to Gary E. Robinette, dated May 6, 2013, regarding bonus award.
  21.1      List of Subsidiaries.
  23.1      Consent of Ernst & Young LLP, independent registered public accounting firm.
  23.2   Consent of Paul, Weiss, Rifkind, Wharton & Garrison LLP (included in Exhibit 5.1 to this Registration Statement).
  24.1†      Powers of Attorney (included on signature pages of this Part II).

 

 

 

*   To be filed by amendment.

 

**   Management agreement.

 

  Previously filed.